Tick Size and the Decline of Short-Term Futures Trend Following
Summary
The study examines why short-term trend-following returns have weakened since around 2009. It analyzes a cross-section of liquid futures contracts over 1995–2025 alongside a CTA proxy, comparing results by signal speed and asset class. It evaluates capacity, electronic trading, changes in CTA interactions with order flow, and a market-microstructure explanation.
The reported distinction is volatility-normalized tick size: after 2008, trend performance deteriorates on small-tick contracts across signal horizons, while large-tick contracts largely retain it. The authors interpret this pattern through a feedback mechanism in which trend trades reinforce the price moves that trigger them, and argue that high-frequency market makers’ responses to predictable flow disrupted this mechanism in sparse small-tick books. This is an empirical interpretation of the observed pattern; the document does not establish that the mechanism will persist or that the findings generalize beyond the contracts and period studied.
Key ideas
- The study reports a decline in short-term trend-following performance beginning around 2009.
- It compares futures contracts by signal horizon and asset class, and evaluates several proposed explanations.
- Volatility-normalized tick size distinguishes contracts where trend returns weakened from those where they remained largely intact.
- The authors propose that trend trading can reinforce price moves through market impact.
- They attribute the small-tick decline to changes in market-maker behavior and reduced support for this feedback loop.
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Full text
# Is Trend Still Your Friend?: A Microstructural Account of the Demise of Short-Term Trend-Following # Is Trend Still Your Friend?: A Microstructural Account of the Demise of Short-Term Trend-Following Systematic trend following has, on average, been profitable for at least two centuries; yet since approximately 2009, short-term trends have ceased to deliver reliable returns. Using a cross-section of roughly 100 liquid futures contracts spanning 1995-2025, together with an industry-representative CTA proxy, we document the break and characterise its dependence on signal speed and asset class. We evaluate four candidate explanations - capacity constraints, market electronification, a regime change in CTA-versus-order-flow interactions, and a microstructural mechanism - and find that the first three fail on grounds of timing, magnitude, or cross-sectional heterogeneity. Our central empirical finding is that the cross-sectional variable distinguishing degraded from surviving trends is the volatility-normalised tick size: post-2008 trend PnL has collapsed on small-tick contracts across all signal horizons, while remaining essentially intact on large-tick ones. Neither asset class nor liquidity replicates this dichotomy. We interpret this result through a self-fulfilling feedback loop that, in our view, lies at the heart of the trend anomaly itself: trend signals trigger directional trades, whose market impact reinforces the very price moves that generated the signal. Both the profitability and the persistence of trend are sustained by this impact channel, which requires that trend followers can execute aggressively at reasonable cost. We argue that the post-crisis transition to HFT-dominated market making, whose liquidity-withdrawal behaviour in front of predictable directional flow has sharply contrasting consequences for sparse (small-tick) and dense (large-tick) limit order books, has broken this loop on small-tick contracts. On large-tick contracts, residual depth remains sufficient, and the loop continues to operate.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.