A report suggesting high-frequency trading (HFT) in futures markets does not impact volatility fails to take into account the wider impacts of increased message traffic on the markets and participants, an expert has warned.
Peter Ward, global head, futures and options, electronic trading for J.P. Morgan, told theTRADEnews.com the Futures Industry Association (FIA) report reached conclusions similar to studies surveying equities trading. He said many participants remain agnostic about the impacts of HFT in futures trading, but that HFT-driven changes to technology have increased susceptibility to errors.
The FIA, last week published the report, titled ‘Futures Market Volatility: What Has Changed?’ which examined the impact of changes in market microstructure on the volatility of futures returns.
By modelling the implied volatility in equity index options and computing return volatility over different holding periods, the report showed realised return volatility had not changed with the growth of HFT.
“After controlling for changes in the rate of information flow, there is no evidence to suggest that realised return volatility in electronically-traded futures markets has changed through time, as least with respect to the fifteen contract market that were examined,” the report concluded.
“I'm not surprised this FIA report doesn't show an increase in volatility linked to HFT, and it is broadly in line with similar reports focused on the equities market,” Ward said.
“The flip side of HFT for institutional investors is the effects of greater message traffic and the subsequent need to alter exchange technology,” he said.
Such by-products include the need for buy- and sell-side firms to upgrade internal systems from front- through to the back-office. Also, changes to the systems that underpin exchanges increased the possibility of market errors and greater susceptibility to glitches during periods of change.
Ward said of greater importance for derivatives markets in the near future would be the development of swap execution facilities (SEFs), some of which will become operational next month as US regulators approve pending applications.
“Another key area of focus for market participants will be SEFs, which may facilitate arbitrage between swap futures products and instruments trading on SEFs,” Ward said.
Swap futures have grown in popularity since three US derivatives exchanges launched the products last year in response to continued uncertainty over OTC derivatives trading rules under the Dodd-Frank Act.