Market dominated by trend followers leads to extreme price instability.
The article analyzes how extreme price shocks and lack of liquidity affect trend-following traders in commodity markets. The researchers used a computer model to simulate market conditions and found that when trend followers make up a large portion of the market, prices become unstable. They also discovered that imposing limits on trading sizes may not be effective in stabilizing prices, but having a market maker inject or reduce liquidity can help maintain market stability.