Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets

(joint work with Austin Gerig)

How fast should a security trade? To answer this question, we model the trading process via periodic batch auctions and study how market quality is affected as the clearing frequency is changed. In the model, the optimal clearing frequency depends on three factors: (1) the volatility of the security, (2) the intensity of trading in the security, and (3) the correlation of the security's value with other securities. Using rough estimates of these factors for the components of the S\&P 500 index, we find that markets have become significantly faster over the last 22 years. Currently the optimal trading interval for the typical stock is between 1 and a few seconds. Our analysis suggests that speed is important in financial markets and that time delays can harm market quality. On the other hand, our results also suggest that for many securities, milli- and microsecond speeds are unnecessary.

Tea & cake available from 3pm, talk starts at 3.15pm for 30 minutes to then be followed by discussion.


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