Could short selling make financial markets tumble?

It is suggested to consider long term trends of financial markets as a growth phenomenon. The question that is asked is what conditions are needed for a long term sustainable growth or contraction in a financial market? The paper discuss the role of traditional market players of long only mutual funds versus hedge funds which take both short and long positions. It will be argued that financial markets since their very origin and only till very recently, have been in a state of ``broken symmetry'' which favored long term growth instead of contraction. The reason for this ``broken symmetry'' into a long term ``bull phase'' is the historical almost complete dominance by long only players in financial markets. Dangers connected to short trading are illustrated by the appearence of long term bearish trends seen in analytical results and by simulation results of an agent based market model. Recent short trade data of the Nasdaq Composite index show an increase in the short activity prior to or at the same time as dips in the market, and reveal an steadily increase in the short trading activity, reaching levels never seen before.Comment: Revtex, 7 pages, 7 figure

A Mechanism for Pockets of Predictability in Complex Adaptive Systems

We document a mechanism operating in complex adaptive systems leading to dynamical pockets of predictability (``prediction days''), in which agents collectively take predetermined courses of action, transiently decoupled from past history. We demonstrate and test it out-of-sample on synthetic minority and majority games as well as on real financial time series. The surprising large frequency of these prediction days implies a collective organization of agents and of their strategies which condense into transitional herding regimes.Comment: 5 pages, 3 figures, error correcte

The $-game

We propose a payoff function extending Minority Games (MG) that captures the competition between agents to make money. In constrast with previous MG, the best strategies are not always targeting the minority but are shifting opportunistically between the minority and the majority. The emergent properties of the price dynamics and of the wealth of agents are strikingly different from those found in MG. As the memory of agents is increased, we find a phase transition between a self-sustained speculative phase in which a ``stubborn majority'' of agents effectively collaborate to arbitrage a market-maker for their mutual benefit and a phase where the market-maker always arbitrages the agents. A subset of agents exhibit a sustained non-equilibrium risk-return profile.Comment: Revtex, 7 page

Could short selling make financial markets tumble?

It is suggested to consider long term trends of financial markets as a growth phenomenon. The question that is asked is what conditions are needed for a long term sustainable growth or contraction in a financial market? The paper discuss the role of traditional market players of long only mutual funds versus hedge funds which take both short and long positions. It will be argued that financial markets since their very origin and only till very recently, have been in a state of ``broken symmetry'' which favored long term growth instead of contraction. The reason for this ``broken symmetry'' into a long term ``bull phase'' is the historical almost complete dominance by long only players in financial markets. Dangers connected to short trading are illustrated by the appearence of long term bearish trends seen in analytical results and by simulation results of an agent based market model. Recent short trade data of the Nasdaq Composite index show an increase in the short activity prior to or at the same time as dips in the market, and reveal an steadily increase in the short trading activity, reaching levels never seen before.