10 milliseconds is way too slow
Financial historians often point out that one common characteristic of speculative periods in financial markets is the desire to trade more frequently. In other words, market participants can't get enough of a good thing. A recent example is the popularity of day trading during the Technology bubble.
Even with that sense of history, a recent article in the Financial Times still came as a shock to us. The article, entitled "Millisecond trading arrives" (3/19/07) points out that a new trading system being put in place will "reduce transaction times to just 1 millisecond from about 10 milliseconds". The article further points out how such speeds are critical to "market participants using advanced trading strategies".
Some short-term traders are indeed successful. However, our research has consistently shown that the probability of losing money increases significantly as one shortens one's investment time horizon. We have examined periods as long as 10 years and as short as 1 day. Short- term trading is roughly a 50/50 proposition, i.e. success is likely to be luck.
The economic rationale behind our results is simply that fundamentals do not actually change in very short time periods, and that short- term trading is often largely based on meaningless noise.
Nonetheless, 10 milliseconds is now considered too slow for "advanced" trading, and our preference for taking a long-term and fundamentally-based approach to investing is increasingly becoming a starkly contrarian strategy.