High-frequency trading does not raise futures volatility -study

CHICAGO Tue Aug 27, 2013 5:53pm EDT

CHICAGO Aug 27 (Reuters) - Volatility in futures contracts has remained largely stable in the face of increased participation from high-speed and algorithmic traders often blamed for roiling markets, according to a study issued on Tuesday.

The study, released by the Futures Industry Association, examined volatility from roughly 2006 to 2011 in 15 futures contracts traded on platforms run CME Group Inc, IntercontinentalExchange Inc, Deutsche Boerse AG's Eurex, and NYSE Euronext's Liffe. The exchange operators sponsored the study.

It found there is "no evidence to suggest that realized return volatility in electronically-traded futures markets has changed through time."

High-frequency traders are often blamed for increasing volatility because they use computer algorithms to dart in and out of markets faster than the blink of an eye.

"We now have empirical evidence that volatility in the futures markets has neither increased nor decreased once the effects of macro-economic shocks are removed," said Walt Lukken, president and chief executive officer of the futures association.

The association would not disclose the cost of the study.

Conducted by two professors from Vanderbilt University, its release comes as the prevalence of high-frequency trading is fueling concerns about the fairness of markets.

High-frequency trading accounted for more than 60 percent of all futures volume in 2012 on U.S. exchanges, according to New York industry researcher The Tabb Group.

Risks associated with the practice first drew wide attention after the stock market's "flash crash" of 2010, when the Dow Jones Industrial Average dropped about 700 points within minutes. The fall was exacerbated by high-frequency traders unloading their inventory of securities at the depth of the plunge.

CME Group, which owns the Chicago Board of Trade and New York Mercantile Exchange, said the study issued on Tuesday showed the benefits of high-frequency trading.

"This is an important study demonstrating, as many others have already done, that high frequency trading does not increase volatility, but rather serves as an important provider of liquidity for the marketplace," CME spokeswoman Laurie Bischel said.

Representatives for the ICE and NYSE declined to comment. A spokesman for the Eurex could not immediately be reached.

The study used two benchmarks to assess intraday volatility in the 15 futures contracts, which included seven interest rate contracts, five equity index contracts, two crude oil contracts and one sugar contract.

The study does not draw a definitive connection between the rise of high-frequency trading, known as HFT, and steady volatility in the contracts, said Charles Jones, a finance professor at Columbia University's business school.

It was "not really looking at HFT per se, but just looking at the broad arc in terms of the behavior over time," he said. "What they're saying is, taken together, all the changes we've seen in markets haven't increased volatility."

The most natural conclusion is that the increase in high-frequency and algorithmic trading did not impact volatility, said Terrence Hendershott, an associate professor at the University of California at Berkley.

"If HFTs caused a big problem, you would expect to see a lot of ready evidence of it. And they don't find it," he added.

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Comments (2)
There is a difference between liquidity and volatility. Liquidity refers to the volume of derivatives traded and the ease to buy/sell the instrument. Volatility refers to the change in the price (value) of the derivative per unit or relative to other related markets.

HFT adds volume within a very small range; 1-2 ticks. This will improve liquidity, but won’t affect volatility much.

Aug 27, 2013 12:38am EDT  --  Report as abuse
ncshu2 wrote:
To evaluate the conclusion of the study better, I would like to know the percentage share of the computer augmented algorithmic high-frequency trading in the whole market. Without this information, it would be hard to project the current phenomena that algorithmic high-frequency trading has not incurred a significant influence on the market, into the future. Maybe, the algorithmic high-frequency trading has not taken a significant share yet.

Aug 29, 2013 6:37am EDT  --  Report as abuse
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