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FIA study suggests algos and HFT do not affect price volatility

First Published 27th August 2013

The Futures Industry Association released a study which it said suggested algorithms and high-frequency trading did not appear to affect price volatility at a structural level.

Washington, DC - Algorithms and high frequency trading do not appear to affect price volatility, according to a study by the Futures Industry Association which looked at 15 futures contracts on CME Group, Eurex, IntercontinentalExchange and NYSE Liffe.

"The study found that prices in these 15 markets moved through cycles of high and low volatility as well as numerous price spikes attributable to macro-economic events. The study found, however, that volatility attributable to structural factors did not change in most of these contracts. In other words, innovations such as algorithmic and high-frequency trading do not appear to have affected the volatility of prices," the FIA said in a news release.

Robert E. Whaley, director of the Financial Markets Research Center at Vanderbilt University's Owen Graduate School of Management, said that the pace of innovation in futures markets has been "nothing short of remarkable", with most trading now occurring at speeds that would not have been imagined before.

"Yet our research has shown that intraday volatility has not been affected by these changes. Trading is certainly faster than it used to be, but there is no evidence this has caused volatility to increase," said Whaley, one of the report's authors.

Nicolas P.B. Bollen, also a professor at Vanderbilt University's Owen Graduate School of Management, co-authored the study, which was facilitated by the FIA.

The study identified two benchmarks for intraday volatility that can be used to assess the impact of micro-structural changes on intraday volatility while controlling for changes in the rate of information flow. The first was the use of implied volatility in equity index options markets comparied to realised volatility. The second involved computing return volatility over different holding periods and measuring changes in the relative magnitude of volatility.

"In both cases, the analysis found that the volatility measured by these benchmarks did not change through time for most of the 15 contracts that were examined," the FIA said in its release. It said four contracts listed on Eurex were an exception but added that the increase in volatility occurred only in 2011, the last year of the sample period, and was probably due to liquidity problems caused by the euro crisis rather than changes in market structure.

The 15 contracts were:

CME Group

Eurodollar Futures

E-mini S&P 500 Index Futures

Light Sweet (WTI) Crude Oil Futures

10-Year U.S. Treasury Futures

Eurex

Dax Futures

Euro-Stoxx 50 Index Futures

Euro-Bund Futures

Euro-Bobl Futures

IntercontinentalExchange

Brent Crude Futures

Russell 2000 Index Futures

Sugar #11 Futures

NYSE Liffe

FTSE 100 Index Futures

Three Month Euribor Futures

Three Month Short Sterling Futures

Long Gilt Futures

The FIA said the full text of the study was available at: www.futuresindustry.org/downloads/Volatility_Study_8-27-2013.pdf