[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.