Is Trend Still Your Friend? A Microstructural Explanation for the Demise of Short-Term Trend-Following

Short-term trend-following deteriorated after 2008 because high-frequency market making broke the market-impact feedback loop that had supported the strategy in sparse, small-tick futures markets.

• The authors construct a proxy covering about 100 liquid futures contracts across commodities, equity indices, currencies, and government bonds from 1995 to 2025, finding an abrupt post-2008 break concentrated in fast signals while slower signals remained comparatively resilient.
• The decline is not explained by capacity, electronification, or CTA-order-flow dynamics: CTA assets peaked in 2022 after performance had already weakened, liquidity improved after 2018 without a recovery, and same-day execution does not restore fast-signal profitability.
• Volatility-normalized tick size separates the results more effectively than liquidity or asset class: short-term trend returns on small-tick contracts fell to essentially zero after 2008, while large-tick contracts continued near their pre-2009 performance.
• The proposed mechanism is that HFT market makers withdrew from predictable directional flow, leaving sparse small-tick order books too shallow for CTAs to trade without walking the book; this reduced trend-following activity and removed the price-impact reinforcement that sustained the signal.
• The evidence has important limitations: the break dates for different microstructure measures range from 2008-09 to 2015, the small-tick effect is closer to a gradient than a binary split, and the HFT causal mechanism is not directly identified.

Takeaway: Investors should treat the deterioration of fast trend-following as potentially structural, assess managers by signal horizon and instrument-level microstructure rather than aggregate CTA capacity, and avoid assuming that the trade will recover without a major change in liquidity provision or tick-size regimes.