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

Tyler Durden's picture


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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Thu, 03/21/2013 - 18:46 | 3359672 OptionNinjaNYC
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Financial Humor - Gotta Looooveee That Exchange Rate



Thu, 03/21/2013 - 19:15 | 3359780 AlaricBalth
AlaricBalth's picture

“Fast and stupid is still stupid. It just gets you to stupid a lot quicker than humans could on their own. Which, I admit, is an accomplishment," she added, "because we're pretty damn good at stupid.”
Jack Campbell, Invincible

Thu, 03/21/2013 - 19:26 | 3359824 OptionNinjaNYC
OptionNinjaNYC's picture

Amen To That.

Never Underestimate the Predictability of Stupidity.

Thu, 03/21/2013 - 19:25 | 3359821 whatsinaname
whatsinaname's picture

I thought you meant 99% of the moves are out of step from reality.

Thu, 03/21/2013 - 18:47 | 3359676 Croesus
Croesus's picture

The whole damn market is disconnected from reality....

Thu, 03/21/2013 - 18:50 | 3359687 Coffin Dodger
Coffin Dodger's picture

It's fucked - we all know it - but it's all we know. So, what next?

Thu, 03/21/2013 - 18:50 | 3359689 Coke and Hookers
Coke and Hookers's picture

You can't skim the market without volatility so you create it.

Thu, 03/21/2013 - 18:50 | 3359691 chump666
chump666's picture

The market needs to be killed.

Thu, 03/21/2013 - 19:20 | 3359800 McMolotov
McMolotov's picture

The market died a while ago, and it's been Weekend at Bernie-ing since then.

Thu, 03/21/2013 - 19:53 | 3359872 chump666
chump666's picture

But Remember you gotta shoot it in the head, to really kill it...

Thu, 03/21/2013 - 19:00 | 3359722 FranSix
FranSix's picture

Where market unreality and HFT leads to higher trades, the Alberta Securities Commission finds that an oil worker manipulated markets in one particular company by buying into the close, resulting in a higher stock price over many weeks:


Since the 'no down-tick' rule was abolished in Canada in 2011, this allows sell-side brokers to sell into the bid without first owning any shares, as long as the position is hedged into treasuries.  The beneficiary of this move was probably 10-year CGB since that time:


Today the Canadian government released its budget, allowing junior mining firms a tax break if they dilute their shares, resulting in a lower share price, but removing tax incentives for development capex on mining firms intent on developing new mines.  This is supposed to be a 'jobs' budget.


Therefore, sell-side brokers get the advantage over junior mining firms just before tax returns are due on April 1.

Thu, 03/21/2013 - 19:00 | 3359731 Waterfallsparkles
Waterfallsparkles's picture

I think that HFT only knows how to buy.  I do not think they are programed to short.

Thu, 03/21/2013 - 20:05 | 3359909 chump666
chump666's picture

Humans are still the liquidity providers, HFTs just scalp and flip from bid/offer offer/bid usually on 2point spreads.  The exchanges are now crowded with HFTs.  If the market panics on something, anything...The market goes short, the HFTs 'scratch' cut trades to avoid losses.  Since they are algorithmic (automatic) every-time they re-enter a trade in a falling market, they cut trades again and again = flash crash.

Hence CB's now throwing everything at the stock market to keep it bid.

House of f*cking cards


Thu, 03/21/2013 - 22:15 | 3360372 Ness.
Ness.'s picture

Bidless.  Algos fistfuck themselves searching for an out.  Then BOOM!


Mom and Pop ain't buying.  You're on your own now.

Thu, 03/21/2013 - 20:52 | 3360019 overbet
overbet's picture

I know what youre saying, but of course they short. Who do you think lobbied to get the uptick rule abolished?

Thu, 03/21/2013 - 19:01 | 3359741 rsnoble
rsnoble's picture

Well let's see.......we all know they love green fridays.  Not that big a drop today, low volume, 99% of the time this has resulted in tons of good news and a ramp on friday.

I long for the day it doesn't happen will tomorrow be it?  I wouldn't bet on it.  We'll see.

Thu, 03/21/2013 - 19:03 | 3359743 tenpanhandle
tenpanhandle's picture

Isn't that about the same ratio for mainstream media news, also?

Thu, 03/21/2013 - 19:07 | 3359757 fuu
fuu's picture

"We propose a novel index of short-term endogeneity (or reflexivity) derived by calibrating the Hawkes self-excited conditional Poisson model on empir- ical time series of trades. The Hawkes model accounts simultaneously for the co-existence and interplay between the exogenous impact of news and the endogenous mechanism by which past trading activity may influence fu- ture trading activity. Technically known in the mathematical literature on branching processes as the branching ratio, the reflexivity index is quanti- fied for several commodity futures markets (corn, oil, soybean, sugar, and wheat) and also for a benchmark equity futures market (E-mini S&P 500). Specifically, the reflexivity index is the average ratio of the number of price moves that are due to endogenous interactions to the total number of all price changes, which also include exogenous events. We find an overall increase of the level of short-term endogeneity since the mid-2000s to October 2012, with a typical value nowadays around 0.6–0.7, implying that at least 60–70 per cent of commodity price changes are now due to self-generated activities rather than novel information. Our robustness tests show that the branching ratio provides a ‘pure’ measure of endogeneity that is independent of the rate of activity, order size, volume or volatility."


Meanwhile Finance Ministers play Angry Birds in a hallway.


Thu, 03/21/2013 - 19:08 | 3359760 Bay of Pigs
Bay of Pigs's picture

What are fundamentals again?

Thu, 03/21/2013 - 19:10 | 3359767 Coke and Hookers
Coke and Hookers's picture

Bad news for the market and are therefore ignored.

Thu, 03/21/2013 - 19:12 | 3359773 Lordflin
Lordflin's picture

No wonder I am confused.

Thu, 03/21/2013 - 19:21 | 3359783 ebworthen
ebworthen's picture

"...calibrating the Hawkes self-excited conditional Poisson models."

Yes, I like that.

My self-excitement is always related to fundamentals: 


And Bernanke denies he is targeting asset prices; like equities and housing.  Uhm-hum. 

Thu, 03/21/2013 - 19:22 | 3359811 McMolotov
McMolotov's picture

I'd target her asset price.

Thu, 03/21/2013 - 22:11 | 3360348 Tijuana Donkey Show
Tijuana Donkey Show's picture

Be warned, there is a 18 year penalty if you don't make an early withdraw..............

Fri, 03/22/2013 - 01:08 | 3360805 StychoKiller
StychoKiller's picture

That cammoflauge ain't working too good... :>D

Thu, 03/21/2013 - 20:21 | 3359947 jimmyjames
jimmyjames's picture

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).


I would guess all the crashing dollar/causing price inflation guys will show up and shoot this down in flames?

Thu, 03/21/2013 - 20:47 | 3360012 WallowaMountainMan
WallowaMountainMan's picture
Disconnected From Fundamental Reality

you rang?


Thu, 03/21/2013 - 21:04 | 3360061 q99x2
q99x2's picture

With all that algo action. Makes one wonder who's feeding them. It all has to be imaginary. You got a bid and an ask and them in the middle so the bid = ask and market maker gone. Market maker's not paying them. They must be taking a chunk out of the sell and the buy. But then there are only a few live ones of those (pension funds). So the little suckers are cannibalistic chawing on each other. Like some kinda pollution in the market that drowned out everything except Bernanke and friends. As the real volume declines and the algo volume increases there'll come a time, in a flash, when they all drive themselves into oblivion. Should happen more often as their volume increases.

Thu, 03/21/2013 - 21:13 | 3360086 Downtoolong
Downtoolong's picture

We've gone from Making Markets to Making Up Markets.


Thu, 03/21/2013 - 21:42 | 3360204 Pairadimes
Pairadimes's picture

Fuh uh uh uh uh uh double-de-duh uh uh uh uh uccckkk you, Bernanke!!11!!ELEVENTY!!1!

Thu, 03/21/2013 - 21:52 | 3360257 dolph9
dolph9's picture

The stock market is dying in front of our eyes and believe me, this is not a good thing.

A sound stock market would at least provide some amount of safety for capital as the bond market goes bust.

But it turns out that neither can protect wealth.

Thu, 03/21/2013 - 21:57 | 3360270 LongBallsShortBrains
LongBallsShortBrains's picture

If the market is so predictable, where is your fat stack?

Let me guess... You blew out a few accounts, so it must be rigged?

You are dealing with a market of people with time horizons of between 12 milliseconds, and thirty years. They are all emotional. They get greedy. They get scared. They have learned to disconnect from the news because the news lies to them. The market is never how you want it to be, and it is never wrong. Only you are wrong for trying to convince yourself that you have a fucking clue about why every dipshit with a 401k, or some alcoholic billionaire with a taste for opportunity puts on a trade. Most of the "news" that affects the markets are the movements of other markets. A lot of fucktards who cant keep up with a mortgage manage other people's money in these markets.

Did your analysis take into account any of this? Or just that the media doesn't mean shit anymore and traders all know it.


Thu, 03/21/2013 - 22:13 | 3360354 El Hosel
El Hosel's picture

 STFU and shave your nuts. "People" don't do milliseconds, its called organized crime.

Thu, 03/21/2013 - 23:36 | 3360649 LongBallsShortBrains
LongBallsShortBrains's picture

Organized crime perpetrated by computers programmed by people.

I'll shave them when I pull them off your moms chin. They should be wet enough for a shave then. Then I might stfu, but I doubt it.

Let me guess... You blew up your trading account too? Maybe you should program trading computers. Since it is so easy to rig markets with a program. Too dumb? Maybe you should stfu.....

Fri, 03/22/2013 - 09:41 | 3361662 Clowns on Acid
Clowns on Acid's picture

You are wrong Balls....

Fri, 03/22/2013 - 04:28 | 3361074 orangegeek
orangegeek's picture

The market is detached from reality.


It's difficult for investment houses to stay in business this way - effectively skimming the markets each day.


In short, this too shall collapse.

Fri, 03/22/2013 - 05:31 | 3361122 supermaxedout
supermaxedout's picture

Manipulation of the stock market is an age old phenomen. New is only, that its electronically, computerized, effetive, cheap and systematiclly on a world wide scale. Just install some more computers whenever needed to control the mayor markets and companies.

All stock quotes of mayor companies are political nowadays. Politics drives up the prices or down whatever fits to the actual political strategy. A company can be as rotten as hell, as long as it still stands somehow according to the paperwork. This is enough to qualify for sky high stock quotes if desired.  On the other side the same is true. Everything in a company might be excellent but the stock price is clubbed down and stays there for years if necessary.

Its all the work of the "Masters of the Markets" hiding behind mystical HFT. HFT is not a power its a tool of the" Masters of the Markets". 

Fri, 03/22/2013 - 06:42 | 3361169 EclecticParrot
EclecticParrot's picture

Despite technological advances, age-old adages remain relevant:  'no news is good news.'

Scientific principles, thankfully, also remain steadfast, such as:  the higher the frequency (e.g. HFT), the shorter the wavelength (i.e., 'wave length').  This is why the lower-frequency bass sounds from your neighbor's stereo can wrap around the walls and shake you through the long wavelengths, while a Vivaldi piccolo concerto is stopped dead in its tracks.  It may also explain why the speaker components responsible for producing the highest (and, some would say, the most annoying) frequency sounds are known as 'tweeters.'  Hmmm -- 'tweeters' -- high-pitched and high-frequency -- you can't make this stuff up.

Fri, 03/22/2013 - 10:28 | 3361916 HF Critic
HF Critic's picture

 (and, some would say, the most annoying) frequency sounds are known as 'tweeters.' 


Fri, 03/22/2013 - 09:53 | 3361734 More_sellers_th...
More_sellers_than_buyers's picture

Cant someone just create an algo to completley bankrupt HFT's? cant be that hard

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