High-frequency trading aided by computer algorithms has been blamed for massive disruptions in equities markets in recent years, most notably the Flash Crash of May 2010, in which the Dow Jones Industrial Average plummeted more than 1,000 points in minutes.
While high-frequency trading has been linked to several high-profile episodes, a new study conducted by 菠萝视频 University finance professors and finds there has been no discernable uptick in average global market volatility correlated with the rise of high-frequency computer trading.
鈥淚f market microstructure considerations play an important role in the measurement of realized volatility,鈥� then that level of realized volatility should exceed the implied volatility measured by the CBOE鈥檚 Market Volatility Index, or VIX. 鈥淚ndeed, just the reverse is true,鈥� write Bollen and Whaley in the , which was commissioned by the (FIA), a trade group representing major derivatives markets. The authors found similar results for market volatility benchmarks in London and Europe.
The authors also tracked a signal-to-noise ratio for return volatility over time. This confirmed the presence of 鈥渕icrostructural effects鈥� 鈥� factors like the increased use of high frequency, algorithmic trades. 鈥淏ut, more importantly, the relative magnitudes (of volatility) have not increased meaningfully through time,鈥� the authors write. 鈥淭aken together, these two results indicate that, 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.鈥�
To gauge volatility across a broad section of the market, Bollen and Whaley examined 15 futures contracts markets: Seven interest-rate futures contracts, five stock-index futures contracts, two crude-oil futures contracts, and one agricultural-futures contract.
鈥淲e don鈥檛 deny that high frequency trading can cause temporary problems,鈥� Bollen said in summarizing the findings. 鈥淲hat we do show is that at typical measurement frequencies 鈥� daily and monthly, for example — volatility levels do not appear to be affected by the rise in high frequency trading. For long-term investors these are the frequencies that matter.鈥�
By Ryan Underwood