If brokers simply decided on their own what and when to buy and sell, the distribution of returns how often returns of a given size are obtained would be Gaussian . A closer look at the market statistics reveals that the return distribution is not Gaussian but power law the telltale mathematical sign that all is not random. Researchers Victor Eguiluz and Martin Zimmermann, of the Mediterranean Institute for Advanced Study, Mallorca, Spain, wondered what would happen to the returns if, instead of acting alone, brokers followed herd instinct, just as sheep move en masse across a hillside, or as migrating wildebeest pour across the plains of Africa. The herd idea makes some sense. Brokers act on rumours that spread across the market floor.
Big transactions trigger other brokers into action.
Decisions are made on the say of computer software and brokers often use the same software. Eguiluz and Zimmermann ran a computer simulation wherein 'agents' representing brokers could buy or sell, or wait. While waiting, agents made random links to other agents, building up a network. When one agent bought or sold, all the others in that agent s network did the same. Summing up the calculated returns the researchers did indeed find a power law describing how often a return of a given size was made.