MITRE and University of Vermont Identified More Than $2 Billion of Inefficiencies in U.S. Stock Market in 2016

McLean, Va., and Bedford, Mass., February 14, 2019 – This week, MITRE and University of Vermont (UVM) released two papers that analyze 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 researchers studied market behavior using Thesys StarMap, the most comprehensive source of publicly available stock market data and the same data used by the U.S. Securities and Exchange Commission for its Market Information Data Analytics System (MIDAS).

The papers examine trades and the resulting inefficiencies for all stocks in the Dow Jones Industrial Average 30 (paper 1), Standard & Poor’s 500, and Russell 3000 (paper 2) indices. These stocks trade in the National Market System (NMS), colloquially referred to as the “stock market.”  The NMS is comprised of 13 geographically distributed exchanges, including the New York Stock Exchange in Mahwah, N.J., and Nasdaq in Carteret, N.J. Therefore, the NMS may present different prices to traders at different locations, leading to market inefficiencies.

“The U.S. stock market has fundamentally changed in the past dozen years,” said Brian Tivnan, MITRE’s Modeling and Simulation Center chief engineer. “During our nearly decade-long partnership with UVM, we’ve used advanced analytics in new and different ways. This research analyzes market dynamics and revisits previous notions of market efficiency—and informs new approaches to enhance the resilience of our financial infrastructure. While we observed many market inefficiencies, it’s important to remember that these inefficiencies incentivize market participation.”

As the financial crisis began to unfold in 2008, MITRE focused a component of its independent R&D program on the resilience of the financial system. Shortly thereafter, MITRE and UVM partnered to look at challenges to the stability of the financial sector and related problems in other large-scale, complex systems. For example, in 2014, the partnership developed a novel approach to minimize cascading risk within and between critical infrastructure networks.

“At the Vermont Complex Systems Center, we connect the dots in large-scale data to reveal the mechanisms responsible for emergent behavior,” stated Chris Danforth, UVM associate professor and associate director of the Center. “Our partnership with MITRE gives us access to state-of-the-art applications, expertise, and the data required to explore complex systems like the stock market.”

Read the complete analyses and findings around the Dow 30 in the research paper, Fragmentation and Inefficiencies in the U.S. Equity Markets: Evidence from the Dow 30.

Read the complete analyses and findings around the S&P 500 and Russell 3000 in the research paper, Scaling of inefficiencies in the U.S. equity markets: Evidence from three market indices and more than 2900 securities. 

About The MITRE Corporation

MITRE’s mission-driven teams are dedicated to solving problems for a safer world. Through our federally funded R&D centers and public-private partnerships, we work across government to tackle challenges to the safety, stability, and well-being of our nation.

About University of Vermont

Founded in 1791, the fifth oldest university in New England, the University of Vermont is a premier research university that places emphasis on undergraduate education.

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