Futures steady in electronic era

Computer algorithms are not causing increased volatility, study concludes

CHICAGO, Ill. (Reuters) — Futures contracts have remained largely stable in the face of increased participation from high-speed and algorithmic traders often blamed for roiling markets, according to a new study.

The study, released by the Futures Industry Association, examined volatility from 2006 to 2011 in 15 futures contracts traded on platforms run by 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 of the futures association.

Conducted by two professors from Vanderbilt University, the study’s 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 last year on U.S. exchanges, according to the Tabb Group, a New York industry research company.

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 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 the New York Mercantile Exchange, said the study 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 spokesperson Laurie Bischel said.

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 (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 in-creased 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.”


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