CME Group Study Says High-Frequency Traders Mute Price Swings

A senior executive of CME Group Inc. (CME) said Tuesday that a lengthy study of the futures exchange company's markets showed no evidence that high-frequency traders drive up volatility or increase costs for investors.

An evaluation of trading over a two-year period in CME's commodity, interest-rate and stock-index derivatives markets found that as algorithm-driven firms did more business, prices became less turbulent and liquidity improved, according to Bryan Durkin, chief operating officer of CME.

"There is considerable evidence that high-frequency traders increase liquidity, narrow spreads and enhance the efficiency of markets," Durkin said at an event hosted by Terrapinn Holdings Ltd.

The world's largest futures exchange operator is rebutting assertions that computer-driven trading firms--which represent its biggest customer group--are behind spikes in volatility and disadvantage slower-moving investors. Brokers have eyed sudden price swings, most recently in commodity markets like crude oil, looking for evidence that high-frequency trading firms are behind the moves.

Durkin said that 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, he said, algorithmic trading activity was "positively correlated" with more efficient markets and less abrupt price swings.

"The collective research broadly underscores the fact that algorithmic traders are significant providers of liquidity, particularly when acting in a market-making capacity," Durkin said Tuesday.

High-frequency trading, driven by a small but growing group of privately held firms that trade their own money, for years has raised concerns among market participants wary of their closely guarded strategies and sheer volume of business. High-frequency trading has been estimated by industry consultancy Tabb Group to represent about 53% of each day's stock-trading activity.

"Rather than vilifying this group, as some have sought to do, we believe we should establish market structures that promote, rather than discourage, [high-frequency traders'] participation," Durkin said.

About 85% of CME's trading is done electronically, Durkin said, with the company processing more than 5 billion orders per month across its four exchanges. A new data center facility built in Aurora, Ill., has reduced the time it takes for sophisticated firms to trade on CME's markets to 4.6 milliseconds.

Durkin said that the exchange has implemented a range of controls designed to guard against misfiring trading algorithms.

Regulators have examined the business, particularly following the "flash crash" of May 2010. Concerns persist among some market participants that algorithm-powered firms disadvantage slower-paced investors or intentionally drive price swings to create trading opportunities.

The idea that such firms seek to churn up price volatility is false, said Arzhang Kamarei, president of Tradeworx, a New Jersey-based firm that runs a high-frequency trading fund. If such strategies worked, Kamarei said at the same event Tuesday, markets would be growing more turbulent rather than the current long-term trend toward lower volatility--which has pressured some high-frequency traders' bottom lines.

"And if that were the case, the market cap of HFTs would be larger than the banks," Kamarei said.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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