The epistemic value of a millisecond: quotes, speed bumps, and market design

In this paper I discuss the epistemic value of a quote and the effect of technological innovations on this value and on market design. The epistemic value of a quote is the agent’s belief about the correct price of an asset. Time, even milliseconds, is an essential feature of this epistemic value: in these milliseconds you can access certain information, and get to know how the markets is moving, and adjust your order to it consequently, so they produce an advantage that can be used to profit, or to avoid losses, from price changes that happen very quickly. The epistemic value of a financial millisecond is the advantage that can be gained by being able to trade in a millisecond faster than your competitors. ‘Micro-quotes’ are the result of financial technology innovations. Micro-quotes are quotes with a theoretical expiration date measured in milliseconds since they can be placed and then canceled at any time. I discuss how they produce ‘ghost liquidity’ and a loss of epistemic values, and how a solution is a different market design. In this case a solution is the introduction of speed bumps, which try to level the playing field for traders who do not have the fastest technology by delaying the execution of orders for a short period of time, which gives slower traders a chance to react to price changes. I examine three distinct speed bump worlds (World 1: Takers-priority, World 2: Makers-priority, World 3: No-priority) and their epistemic and moral features, and I discuss how they can be purposely designed based on predetermined objectives. This process falls under the realm of ‘reverse finance’, wherein we begin with specific financial market goals and then create a system that can achieve those objectives more effectively. Finally, I examine how the choice of the target and time threshold of speed bumps is not a value-neutral or technical decision. It has a significant impact on the structure and agents of financial markets, and it is epistemically and morally loaded: it determines who has access to information and who is able to profit from market movements, and also how efficient and stable financial markets are.