The latest research examining market activity during August’s tumultuous market conditions maintains there is no link between high volatility and high-frequency trading.
The study, by agency broker Instinet, used data based on FTSE 100 market activity to examine the daily structure of volatility during the first and last two weeks of August and throughout the month of July.
Instinet compared this data with its own proprietary measure of real-time high-frequency trading (HFT) activity, to measure when these types of traders were more or less active in the market.
It found that volatility during all three of the time periods examined was higher during the morning, particularly in the first half of August, and that HFT firms were proportionally less active at the beginning of the trading day.
Since the extraordinary levels of volatility in August, which stemmed from ongoing concerns over the stability of the eurozone and the ability of the US to meet its debt obligations, many market observers blamed high-speed trading for exacerbating uncertainty.
But the Instinet research seems to indicate the opposite, suggesting the lack of HFT during the morning heightened volatility, or that high volatility acted as a disincentive for HFT firms to trade.
Instinet added that the link could also be explained by secondary correlations with volatility that were not accounted for.
Instinet’s findings chime with recent findings by Australia-based consultancy the Capital Markets Cooperative Research Centre (CMCRC), which found HFT tends to stabilise markets during periods of market turmoil.
“Some HFT strategies pursue mean reversion strategies and try to profit from price volatility by riding a market dislocation until it reaches an equilibrium,” said Alex Frino, CEO of CMCRC, at the time.