Wageningen University & Research (WUR), the European Organization for Nuclear Research (CERN) and The Commodity Risk Management Expertise Center (CORMEC) signed an agreement to collaborate on research that aims to create new methods to protect commodity and financial markets from malpractices (fraud), to identify anomalies that can harm the integrity of these markets and, subsequently, to improve the design and regulation of markets.
During a visit to CERN, WUR / UM economist, professor Joost Pennings realised there are similarities between the billions of particle collisions in CERN’s Large Hadron Collider and the high-speed trading on commodity futures markets in which multiple orders per nanosecond are placed. Most transactions, or collisions, show no anomalies. But when they do, this may lead to new, ground-breaking insights for both economists and physicists.
This research draws on the unique market data from WUR and CORMEC, as well as their deep understanding of markets. CERN contributes data-analysis expertise and techniques such as ROOT The combined expertise will help to combat fluctuations in markets caused by anomalies, possibly induced by market design, and market manipulations induced by fraudulent behaviour.
The collaboration attempts to identify and predict market manipulation. This should enable regulators to create safer and more stable market environments, by keeping pace with the rapidly changing trading environment, leading to improved regulation and development of market structures (design) that enhance the integrity of markets. The research may lead to diagnostic tools to predict financial instability. In addition, this research will indirectly help market participants (hedgers) to better manage their risk, thereby lowering capital costs – a necessary condition for innovation.
The three-year project, named High Energy Physics Tools in Limit Order Book Analysis (HighLO), is supported by the Province of Limburg in the Netherlands. The first results are expected at the end of this year.