Light-speed limit creates microsecond trading edge clocks can't fix

A fundamental law of physics, not better timekeeping, is the root cause of information asymmetry in financial markets.

Information asymmetry in financial markets is a physical impossibility to eliminate, not a technical problem to solve, because the speed of light prevents simultaneous data distribution, a WSJ letter argued Monday.

"Modern technology has mostly worked to mitigate information asymmetries, but financial markets now operate at speeds that make transient information asymmetries unavoidable," Brian Mannix of Gainesville, Virginia, wrote in a letter published by the Wall Street Journal.

Mannix, responding to a July 6 op-ed by Nishant Sahdev on timekeeping, argued that when government agencies release data on inflation, employment or crop yields, some firms inevitably access it first and transmit it to traders who exploit microsecond advantages. The resulting inefficiencies can be addressed through market designs that slow the pace of trading, he wrote, but more accurate clocks will not solve the underlying problem.

The argument adds to a long-running debate over high-frequency trading and market structure, where regulators have weighed speed bumps, minimum resting times and batch auctions as potential remedies. The SEC under both the Trump and Biden administrations has examined whether exchange-design changes could level the playing field between HFT firms and institutional investors.

The IEX exchange, subject of Michael Lewis's 2014 book "Flash Boys," introduced a 350-microsecond speed bump in 2016 to counter the advantage of ultra-fast traders, a design the SEC approved after a contentious review. The exchange's "crumbling quote" indicator and discretionary peg orders were intended to protect slower investors from being picked off by faster market participants.

The physics constraint Mannix describes is rooted in Einstein's theory of special relativity, which establishes the speed of light — roughly 186,282 miles per second in a vacuum — as the universe's maximum information transfer rate. In fiber-optic cables, the effective speed drops to about 124,000 miles per second, meaning a trader's physical proximity to a data center or exchange server can create measurable advantages measured in microseconds, or millionths of a second.

The debate has intensified as government data releases have become increasingly automated. The Bureau of Labor Statistics and other agencies employ strict embargo protocols and automated release systems designed to minimize the window for early access, though Mannix's argument suggests these measures can never fully eliminate the gap.

"Some firms access it first, and transmit it to traders who are able to exploit microsecond advantages over others," Mannix wrote. The remedy, he said, lies not in more precise timekeeping but in market design changes that slow the pace of trading.

The SEC under Chair Gary Gensler proposed a series of market structure reforms in 2022 and 2023, including a minimum order tick size for certain stocks and changes to the order protection rule under Regulation NMS. The agency also sought comment on whether to require batch auctions — periodic matching of orders at set intervals — as an alternative to continuous trading.

Critics of speed-bump mechanisms argue they create a two-tiered market that disadvantages firms that choose not to locate their servers near exchange data centers. Proponents counter that the current system already advantages those who can afford the fastest connections and that deliberate slowing restores balance.

The letter's publication comes as market participants await further SEC action on market structure under the current administration. The agency has not signaled whether it will pursue additional rulemaking on trading speeds or exchange design.

This article is for informational purposes only and does not constitute investment advice.