[yummyfajitas]

Why would adding delays make the market less turbulent? The standard dynamical systems intuition says that adding delays creates instability. Think about how many stable ODEs have wildly unstable numerical solvers, at least when the step sizes are too high.

Or in terms of project planning, if you have 2 day sprints, you can course correct every 2 days and rapidly approach a usable product. If you have 3 month sprints, you might spend 2.9 months building something totally wrong. 2.9 months of moving the wrong way will get you a LOT further off course than a badly planned 2 day sprint.

[msellout]

Enforcing a delay may reduce the incentive to increase speed at the cost of strategic complexity. If the turbulence is caused by the interactions of overly-simplistic momentum agents, then increasing the complexity of the agents will stabilize the market. This should hold to the extend that increased strategy complexity also increases the variety of strategies in the market.

Think of the market as a liquid near boiling point. If the energy of the system increases too much, it makes a phase transition. To raise the boiling point, add impurities. This is a flawed metaphor in many ways, but it might offer a new intuition for you. Unfortunately, in the case of the market (and many systems) efficiency is the enemy of stability.

If you prefer a project-planning metaphor: BigCo executives have caught Agile fever. They see that 2-month sprints are more effective than 2-year project plans and they've heard their competitors are finding great benefit from 2-week sprints. BigCo decides to leapfrog the competition and goes straight to 2-minute sprints. They've tested their engineers and found that 2-minutes seems to be a lower bound on writing a chunk of useful code. The executives declare that all engineers must report accomplishments and re-plan their next activities every 2 minutes in accordance with proper Agile workflow.

Obviously, extreme speed is disastrous. I'm not saying to slow down the market to making an order once monthly. Just slow down from nanoseconds.

If in doubt, build a small simulation. Simple agent-based models can produce very interesting phenomena.

[yummyfajitas]

Efficiency in the "efficient markets" sense is not instability - it is by definition perfect incorporation of all information into the price.

Fast adjustments are not "energy" in any sense, and smaller but more rapid adjustments are in fact considered to be properties of an "orderly market" (to borrow SEC terminology). Your 2 minute sprint example has a problem with transaction costs, not rapid iteration.

Rather than analogies, can you just state directly how adding latency will stabilize things?

[msellout]

I meant efficiency as in low spreads, not as in Fama.

I tried to state the mechanism directly, but apparently didn't do so very well. I could try again, but I think it'd be more effective to appeal to authority. Check out "The Race to Zero" by Andrew Haldane at the Bank of England (http://www.bankofengland.co.uk/archive/Documents/historicpub...). It appears that the presence of too many low latency / high frequency players puts the market in a state where it can phase shift, crossing from normal "stable" dynamics to a dramatic spiking dynamic. In normal times, "HFT" increases liquidity and reduces spreads. Every so often those HFT players leave the market suddenly, nearly simultaneously, causing a liquidity crisis.

Note that many exchanges enforce a short pause in trading when the market seems to be going crazy. The delay appears to help, so long as traders don't move to a different exchange.

[yummyfajitas]

HFT has clearly lowered spreads. This isn't even in dispute.

The issue of market makers pulling out during a crisis is a regulatory issue; an market maker might do the right thing and push the market back towards where it should be and then be punished by a regulator who breaks the buy trade. If this behavior is undesirable then eliminate the "clearly erroneous trade" rules.

Your citation also doesn't address any specific mechanism by which a delay would improve things. All it does is speculate that speed might be bad due to fat tails and handwaving.

[msellout]

If we hypothesize that speed might be bad, shouldn't we do an experiment to decrease speeds?

You also haven't addressed the point that many exchanges currently implement delays in times of crisis.