Chasing the Same Signals: How Black-Box Trading Influences Stock Markets from Wall Street to Shanghai

Chapter 7. The Game of High Frequency

Why Nobody Has Heard of the Most Active Investors

In 2003, economist Harald Hau made an interesting observation on stocks that were traded on the Paris Bourse. Hau noticed that the volatility of stocks increased when their price increased. From an economics perspective, this was counterintuitive. A stock's volatility is assumed to be a reflection of the inherent fundamental risks in the company. Management restructuring, problems with the firm's products, and declines in consumer confidence were the common drivers of increasing a stock's volatility, because investors were less certain about the firm's future earnings potential. A rising share price, in light of fundamental changes in the company, would intuitively be a reflection of increased investor confidence; so why the increase in volatility in the absence of a change in fundamentals?

Economists in many parts of the world have debated the influences on market volatility. Why does Germany have a lower volatility than Greece? The political climate, breadth of investment strategies, quality of firms, local tax environment, and regulatory framework are all relevant factors that economists discuss as influential to the efficiency of the marketplace. But, in light of vastly different comparisons, why do similar companies have different volatility in different countries? Foreign firms listed on dual exchanges, such as many represented by American depository receipts (ADRs), often have lower volatility ...