Wall Street Journal Highlights MITRE Research on Costly Market Inefficiencies

February 14, 2019

In "Brief Price Gaps in Stocks Cost Investors $2 Billion a Year," The Wall Street Journal featured MITRE research with the University of Vermont that analyzed U.S. financial market dynamics and found more than $2 billion in inefficiencies in 2016, the most recent data available for analysis when the research started.

The study provides new evidence of momentary pricing discrepancies that researchers say can be exploited by high-speed traders looking to make a quick profit. The study doesn’t quantify profits from such arbitrage. But its authors say there’s plenty of opportunity for such profits to be made.

“There are pure arbitrage opportunities, and they do follow a surprising structure and pattern across different tickers,” said Brian Tivnan, chief engineer at MITRE, who co-authored the research. “We see them from the smallest of the Russell 3000 all the way up to Apple.”

Researchers examined all trades for stocks in the Russell 3000 index during 2016 and found that nearly 24% of them were executed during times when better prices may have been available. That equated to about 1.1 billion trades that might have been off by pennies a share from better prices available elsewhere in the fragmented U.S. stock market, the authors found. The market includes 13 different exchanges and dozens of off-exchange trading venues known as dark pools.

The Departments of Defense and Homeland Security provided about $1.25 million for the study to better understand how U.S. markets might respond to a cyberattack, according to spokespeople for the agencies’ research arms.

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