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

• DOI: http://doi.org/10.1111/fire.12035
• Author: James J. Angel*
• Published date: 01 May 2014
• Date: 01 May 2014

The Financial Review 49 (2014) 271–281

When Finance Meets Physics: The Impact

of the Speed of Light on Financial Markets

and Their Regulation

James J. Angel*

Georgetown University

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 tunnel through seemingly impregnable quality control procedures.

Keywords: relativity, financial markets, regulation, high-frequency trading, latency, best

execution

JEL Classification: G180

∗Correspondingauthor: Department of Finance, McDonough School of Business, Georgetown University,

509 Hariri Building, Washington, DC 20057; Phone: (202) 687-3765; E-mail: angelj@georgetown.edu.

The author is also on the board of directors of the Direct Edge stock exchanges (EDGX and EDGA). I

wish to thank the editor and referee for extremely helpful comments and suggestions. I also wish to thank

the U.K. Foresight Project, for providing financial support for an earlier versionof this paper. All opinions

are strictly my own and do not necessarily represent those of Georgetown University, Direct Edge, the

U.K. Foresight Project, The Financial Review, or anyoneelse for that matter.

C2014 The Eastern Finance Association 271