Reflexivity from Hierarchical Causality
How financial markets' top-down rules create self-reinforcing feedback loops
When higher-level market rules constrain what trades are allowed, they create a feedback loop where the rules themselves influence the timing and sequence of trades—which then feeds back up to reshape those same rules. The paper shows that this top-down constraint, combined with how individual trades happen in real time, can generate multiple competing causal pathways even when the underlying trading mechanics follow predictable patterns.
Market reflexivity—where prices influence the rules governing trading, which then change prices—has long been observed but poorly understood mathematically. This framework clarifies how regulatory constraints and trading mechanics interlock to create self-reinforcing market dynamics, which matters for predicting when interventions (like circuit breakers or position limits) will work as intended versus when they'll trigger unintended cascades.