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

TL;DR

This paper explores how principles from modern physics, especially the speed of light, influence financial market operations and regulation, highlighting issues like information delays, conflicting observations, and regulatory challenges.

Contribution

It introduces a novel interdisciplinary perspective by applying physics concepts to analyze and address regulatory and operational issues in financial markets.

Findings

Relativistic effects cause discrepancies in observed market prices.

Regulatory challenges arise from information transmission delays.

Software glitches can bypass traditional quality controls.

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.