Fricke, Daniel and Gerig, Austin, Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets (January 1, 2015). Available at SSRN: http://ssrn.com/abstract=2363114 or http://dx.doi.org/10.2139/ssrn.2363114View Journal Article / Working Paper
How fast should a security trade? To answer this question, the authors model the trading of a security 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 for these values, they determine that the ideal interval of trade for a typical U.S. stock is currently 0.2 to 0.9 seconds.
Their analysis suggests that speed is important in financial markets and that time delays of even a fraction of a second can harm market quality. On the other hand, their results also suggest that for many securities, milli- and microsecond speeds are unnecessary.