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CME Study Claims HFT Reduces Price Swings

The futures exchange operator conducted research over a two-year period, finding that computer-driven trading firms increase liquidity and narrow spreads.

CME Group said a lengthy study of the exchange operator’s futures markets, showed there is no evidence that high frequency traders drive up volatility or increase costs for investors, according to a Dow Jones news story.

CME claims that after evaluating over a two-year period its commodity, interest rate and stock-index derivatives markets, it found that algorithmic-driven firms did more business, prices became less turbulent and liquidity improved, according to Bryan Durkin, COO of CME who is quoted in the Dow Jones article.

As the world’s largest futures exchange operator, computer-driven firms are CME’s largest customer group. However, the CME is refuting allegations that HFT shops are behind surges in volatility and disadvantage slower-paced investors who are less automated. Sudden price swings most recently in commodity markets like crude oil, have prompted brokers to look for evidence that HFT firms are behind the moves, said the Dow Jones story.

CME’s study compared the amount of daily trading driven by such firms with the going bids and offers for contracts tied to crude oil, the euro, 10-year Treasury notes, the Standard & Poor’s 500 stock index, and the London interbank offered rate. Over a two-year period, CME found that algorithmic trading was positively correlated with more efficient markets, according to Durkin in the Dow Jones story.

“The collective research broadly underscores the fact that algorithmic traders are significant providers of liquidity, particularly when acting in a market-making capacity,” Durkin told Dow Jones on Tuesday.

CME's COO suggested that rather than crucify high frequency traders, the industry should create “market structures that promote, rather than discourage [high-frequency traders’] participation.”

In the article, Durkin said the CME has implemented a range of controls designed to guard the markets from misfiring trading algorithms.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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