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When Finance Meets Physics: The Impact of the Speed of Light on Financial Markets and their Regulation

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  • James J. Angel

Abstract

Modern physics has demonstrated that matter behaves very differently as it approaches the speed of light. This paper explores the implications of modern physics to the operation and regulation of financial markets. Information cannot move faster than the speed of light. The geographic separation of market centers means that relativistic considerations need to be taken into account in the regulation of markets. Observers in different locations may simultaneously observe different best prices. Regulators may not be able to determine which transactions occurred first, leading to problems with best execution and trade-through rules. Catastrophic software glitches can quantum tunnel through seemingly impregnable quality control procedures.

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  • James J. Angel, 2014. "When Finance Meets Physics: The Impact of the Speed of Light on Financial Markets and their Regulation," Papers 1401.2982, arXiv.org.
    • Handle: RePEc:arx:papers:1401.2982
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    References listed on IDEAS

    as
    1. Emiliano S. Pagnotta & Thomas Philippon, 2018. "Competing on Speed," Econometrica, Econometric Society, vol. 86(3), pages 1067-1115, May.
    2. James J. Angel & Lawrence E. Harris & Chester S. Spatt, 2011. "Equity Trading in the 21stCentury," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 1-53.
    3. Michael Goldstein & Gregory Laughlin & Anthony Aguirre & Joseph Grundfest, 2014. "Information Transmission between Financial Markets in Chicago and New York," The Financial Review, Eastern Finance Association, vol. 49(2), pages 283-312, May.
    4. Michael Goldstein & Shengwei Ding & John Hanna & Terrence Hendershott, 2014. "How Slow Is the NBBO? A Comparison with Direct Exchange Feeds," The Financial Review, Eastern Finance Association, vol. 49(2), pages 313-332, May.
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    Cited by:

    1. James J. Angel & Douglas M. McCabe, 2018. "Insider Trading 2.0? The Ethics of Information Sales," Journal of Business Ethics, Springer, vol. 147(4), pages 747-760, February.
    2. Brian F. Tivnan & David Slater & James R. Thompson & Tobin A. Bergen-Hill & Carl D. Burke & Shaun M. Brady & Matthew T. K. Koehler & Matthew T. McMahon & Brendan F. Tivnan & Jason G. Veneman, 2018. "Price Discovery and the Accuracy of Consolidated Data Feeds in the U.S. Equity Markets," JRFM, MDPI, vol. 11(4), pages 1-17, October.
    3. Robert P. Bartlett, III & Justin McCrary, 2016. "How Rigged Are Stock Markets?: Evidence From Microsecond Timestamps," NBER Working Papers 22551, National Bureau of Economic Research, Inc.
    4. Johann Lussange & Boris Gutkin, 2023. "Order book regulatory impact on stock market quality: a multi-agent reinforcement learning perspective," Papers 2302.04184, arXiv.org.
    5. Vitor H. Carvalho & Raquel M. Gaspar, 2021. "Relativistic Option Pricing," IJFS, MDPI, vol. 9(2), pages 1-24, June.
    6. Vitor H. Carvalho & Raquel M. Gaspar, 2021. "Relativistically into Finance," Working Papers REM 2021/0175, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    7. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    8. Hossein Rad & Rand Kwong Yew Low & Robert Faff, 2016. "The profitability of pairs trading strategies: distance, cointegration and copula methods," Quantitative Finance, Taylor & Francis Journals, vol. 16(10), pages 1541-1558, October.
    9. Thomas H. McInish & Olena Nikolsko‐Rzhevska & Alex Nikolsko‐Rzhevskyy & Irina Panovska, 2020. "Fast and slow cancellations and trader behavior," Financial Management, Financial Management Association International, vol. 49(4), pages 973-996, December.
    10. Peter B. Lerner, 2022. "Fourier Integral Operator Model of Market Liquidity: The Chinese Experience 2009–2010," Mathematics, MDPI, vol. 10(14), pages 1-25, July.
    11. Brian F. Tivnan & David Slater & James R. Thompson & Tobin A. Bergen-Hill & Carl D. Burke & Shaun M. Brady & Matthew T. K. Koehler & Matthew T. McMahon & Brendan F. Tivnan & Jason Veneman, 2018. "Price Discovery and the Accuracy of Consolidated Data Feeds in the U.S. Equity Markets," Papers 1810.11091, arXiv.org.
    12. Ryan Garvey & Tao Huang & Fei Wu, 2021. "Is faster or slower trading better? An examination of order type execution speed and costs," European Financial Management, European Financial Management Association, vol. 27(2), pages 326-363, March.
    13. Khairul Zharif Zaharudin & Martin R. Young & Wei‐Huei Hsu, 2022. "High‐frequency trading: Definition, implications, and controversies," Journal of Economic Surveys, Wiley Blackwell, vol. 36(1), pages 75-107, February.

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