The Monty Hall Problem and High-Frequency Trading: The Value of Information and Speed Combined Together
Abstract
The counter-intuitive probabilistic features hidden within the Monty Hall problem display a strong relationship to the dynamics of stock market. Decisions in either system are driven by information and decision-makers may decide whether sticking to their original choice or switching to an alternative one based on their epistemic state. One aspect of this paper deals with the connections between optimal information management suggested by the Monty Hall problem and its application to financial markets. However, in modern markets, mere possession of information superior to most other participants cannot guarantee abnormal returns if it is not supported by low execution latency. This is the second aspect discussed in the paper. The conclusion of the paper is that information and speed combined together create the conditions needed to achieve above average returns. It comes to no surprise that heavy investments go to increasing trading speed, potentially leading to a technological ‘arms race’ that carries high private benefits and high social costs. The main contribution of this paper is the use of simple mathematics to demonstrate how publicly available information, when used at high speed, may ensure abnormal market returns for the few ultra-fast traders, so disrupting the social purpose of stock markets.
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