HFT Reality: 70% Of Price Moves Are Disconnected From Fundamental Reality

While it will be no surprise to any ZeroHedge reader, academic research from ETH Zurich shows that not only are “commodity markets becoming very financialized and computerized… and more susceptible to minor shocks,” but “at least 60-70% of price changes are now due to self-generated activities rather than novel information.” In other words, only about a third of commodity price moves are caused by real fundamental news now (as opposed to 75% pre-HFT).

Using a novel “index of short-term endogeneity (or reflexivity) derived by calibrating the Hawkes self-excited conditional Poisson models” – we thought you’d like that – Didier Sornette (infamous bubble spotter and mathematician) and his team create a measure of endogeneity (or non-news related price movement) across several assets from S&P 500 (below) to Brent Crude (Europe), WTI (US), Soybean (US), Sugar #11 (US), Corn (US), Wheat (US) and Sugar (Europe) – all indicate significant surges post 2006 in non-news related trading activity (HFT noise)

As Reuters reports, they sum up:

“In our view, this evolution partly reflects the development of algorithmic trading and of high frequency trading in particular.”

S&P 500 e-mini futures are tested here – showing that almost 80% of the activeity (lower pane) is unrelated to fundamental news.


Full paper below…


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