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

Published date01 May 2014
Date01 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
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
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.
C2014 The Eastern Finance Association 271

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