New FIA Study Suggests Futures Volatility Not Influenced by HFT

The study, titled 'Futures Market Volatility: What Has Changed?', uses a pair of benchmarks—volatility indexes such as the CBOE's VIX, and signal-to-noise ratios extended over different contract holding periods compared from 2006 to 2011—to examine whether new microstructure changes and styles of electronic trading have significantly influenced realized return volatility, which contrasts to implied volatility and is used for portfolio choice and asset pricing.

On both benchmarks, the authors found little or marginal increases in volatility, at least in measures that can be positively attributed to those structural changes rather than macroeconomic events, especially events such as the Euro crisis that disrupt interest rates.

"Observed or realized volatility can certainly be affected by market microstructure, including bid/ask spreads, electronic versus pit trading, and the rise in algorithmic trading," the authors write. "However, futures prices also respond rapidly and differently to new information; hence changes in the rate of information flow, such as the increase that occurred during the financial crisis, also have a direct effect on volatility. After controlling for changes in the rate of information flow, there is no evidence to suggest that realized return volatility in electronically-traded futures markets has changed through time, at least with respect to the fifteen contract markets that were examined," they continue.

The research comes as exchange venues, futures commission merchants (FCMs), and algo specialists are all looking to support new algo-enabled execution strategies in the space.