When Finance Meets Physics: The Impact of the Speed of Light on Financial Markets and their Regulation
The Financial Review, Volume 49, No. 2, May 2014, Forthcoming
15 Pages Posted: 15 Jan 2014
Date Written: January 8, 2014
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.
Keywords: Relativity, Financial Markets, Regulation, High frequency trading, Latency, Best execution
JEL Classification: G180
Suggested Citation: Suggested Citation