Initial studies of the stock market crash of October 1987 indicate that insufficient linkages between related securities markets, exacerbated by computerized trading, can lead to market instability. This paper examines how the market mechanism can be made more “intelligent,” so that it can provide much of the stabilization currently left to the computer-driven arbitrage activities of independent traders while at the same time enhancing market liquidity. This intelligent market mechanism employs techniques derived from concurrent control theory to link markets together in a way that effectively creates new, synthetic securities markets that coexist with current securities markets. This mechanism permits continuous trade in all markets so that the stabilizing activities of arbitrage occur as a direct by-product of the basic operation of the market mechanism. When the speed of communication between markets is fast relative to the pace of trading, this mechanism will operate so that at the operational level it is completely transparent to traders in the market, giving the appearance of a single, fully-linked free market system. This mechanism and the principles upon which it is based have broader applications to computerized markets in manufacturing and the service industries beyond financial markets.

Note: OCR errors may be found in this Reference List extracted from the full text article. ACM has opted to expose the complete List rather than only correct and linked references.

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