The problem, however, is that this new digital environment features agents that are not only making decisions faster than we can comprehend, they are also making decisions in a way that defies traditional theories of finance. In other words, it has taken on the form of a machine ecology — one that includes virtual predators and prey.

Consequently, computer scientists are taking an ecological perspective by looking at the new environment in terms of a competitive population of adaptive trading agents.

“Even though each trading algorithm/robot is out to gain a profit at the expense of any other, and hence act as a predator, any algorithm which is trading has a market impact and hence can become noticeable to other algorithms,” said Neil Johnson, a professor of physics at the College of Arts and Sciences at the University of Miami (UM) and lead author of the new study. “So although they are all predators, some can then become the prey of other algorithms depending on the conditions. Just like animal predators can also fall prey to each other.”

When there’s a normal combination of prey and predators, he says, everything is in balance. But once predators are introduced that are too fast, they create extreme events.

“What we see with the new ultrafast computer algorithms is predatory trading,” he says. “In this case, the predator acts before the prey even knows it’s there.”

[…]

“It simply is faster than human predators (i.e. human traders) and the humans are inactive on that fast timescale,” says Johnson. “So the only active traders at subsecond timescales are all robots. So they compete against each other, and their collective actions define the movements in the market.”

In other words, they control the market movements. “Humans become inert and ineffective,” he says, “What we found, which is so surprising, is that the transition to the new ultrafast robotic ecology is so abrupt and strong.”

Ref: A new digital ecology is evolving, and humans are being left behind – io9
Ref:  Abrupt rise of new machine ecology beyond human response time – Nature