Structural changes, such as the advent of algorithmic and high-frequency trading (HFT), do not appear to impact volatility in the futures market, suggests a new study published Tuesday by the Futures Industry Association (FIA).
The study, which was conducted by a pair of finance professors at Vanderbilt University, Robert Whaley and Nicholas Bollen, looked at 15 futures contracts listed on the CME Group, Eurex, IntercontinentalExchange and NYSE Liffe. It found that prices in these markets went through cycles of high and low volatility, and saw price spikes attributable to macro-economic events, but that the volatility attributable to structural factors did not change in most of these contracts.
“In other words, innovations such as algorithmic and high-frequency trading that have affected how trading is conducted do not appear to have affected the volatility of prices,” says the FIA, which facilitated the study that was sponsored by the four exchanges in order to better understand the impact of structural change on market quality.
“The pace of innovation in the futures markets has been nothing short of remarkable,” said Whaley. “Where 10 or 15 years ago, most trading took place in the pits, today the lion’s share is executed electronically at speeds that would not have been imagined in days of old. 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.”
“The futures markets have evolved dramatically over the last decade or so, and some people have expressed the view that these changes have caused market quality to deteriorate,” said Walt Lukken, president and CEO of the FIA. “We decided that the best way to address this concern would be to analyze the empirical data to see if there have been any structural impacts on volatility.”
“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,” he added.