The effect of net positions by type of trader on volatility in foreign currency futures markets

We investigate the effect of net positions by type of trader on return volatility in six foreign currency futures markets using the weekly Commitments of Traders (COT) data. When net positions are decomposed into expected and unexpected components, we find that expected net positions by type of trader generally do not co‐vary with volatility. However, volatility is positively associated with shocks (in either direction) in net positions of speculators and small traders, and negatively related to shocks (in either direction) in net positions of hedgers. This evidence suggests that changes in speculative positions destabilize the market. Consistent with dispersion of beliefs models and noise trading theories, hedgers appear to possess private information, whereas speculators and small traders are less informed in these markets. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:427–450, 2002     

A reality check on technical trading rule profits in the U.S. futures markets

This article investigates the profitability of technical trading rules in U.S. futures markets during the years 1985–2004. Statistical significance of performance across the trading rules is evaluated using White's Bootstrap Reality Check and Hansen's Superior Predictive Ability tests, which can directly measure the effect of data snooping by testing the performance of the best rule in the context of the full universe of technical trading rules. Results show that the best rules generate statistically significant economic profits for only two of 17 futures markets after correcting for data snooping biases. This evidence suggests that technical trading rules generally have not been profitable in the U.S. futures markets. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:633–659, 2010     

Liquidity supply and volatility: futures market evidence

This article examines the provision of liquidity in futures markets as price volatility changes. We find that customer trading costs do not increase with volatility. However, for three of the four contracts studied, the nature of liquidity supply changes with volatility. Specifically, for relatively inactive contracts, customers as a group trade more with each other and less with market makers, on higher volatility days. By contrast, for the most active contract, trading between customers and market makers increases with volatility. We also find that market makers' income per contract decreases with volatility for one of the least active contracts in our sample, but is not significantly affected by volatility for the other contracts. These results are consistent with the idea that, for high‐cost, inactive contracts, market makers react to temporary increases in volatility by raising their bid‐ask spreads significantly, and customers provide increased liquidity through standing limit orders. An implication of our results is that electronic systems, where market maker participation is not required, are able to supply adequate liquidity during volatile periods. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1–17, 2001     

Causality in futures markets

This study tests causal hypotheses emanating from theories of futures markets by utilizing methods appropriate for disproving causal relationships with observational data. The hedging pressure theory of futures markets risk premiums, the generalized version of the normal backwardation theory of Keynes, is rejected. Theories predicting that the activity levels of speculators or uninformed traders affect levels of price volatility, either positively or negatively, are also rejected. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1039–1057, 2006     

Index futures leadership,basis behavior,and trader selectivity

Employing intraday data for futures and cash values for the S&P 500 over the 1993–1996 period, we attempt to characterize the lead–lag relationship between these two markets and their basis behavior. Our findings show evidence of pronounced futures leadership when markets are rising, with no feedback from the cash market. However, when markets are falling, futures leadership is less evident and significant feedback from the cash market is noted. We also provide evidence of a positive relationship between the basis and return volatility. We offer an explanation, based on trader selectivity, for the leadership‐asymmetry and the basis–volatility relationship. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:649–677, 2002     

Trading and information in futures markets

This paper studies the trading behavior of different types of traders (customer type indicators [CTI's]) in corn futures. Nonmembers (CTI4) consume most of the intraday liquidity while local traders (CTI1) as market makers are its main provider. Both groups combine most of the intraday trading volume. Interday trading comes mainly from proprietary accounts (CTI2) and other local traders' trades (CTI3), reflecting their longer-term needs for hedging and speculation. Changes in the overnight positions of the general public (CTI4) and clearing members (CTI2) contribute mostly to daily price discovery, while the positions of CTI3 group reflect possible information advantage about future price movements.     

Interdealer trading in futures markets

Trading amongst dealers on the floor of the futures exchange is examined. Since there is only one trading venue, the common floor area, trading between dealers is carried on in the presence of trades involving customer orders as well, offering a unique setting for testing the effect of inventory on dealer pricing. The findings are that these futures floor traders implicitly engage in interdealer trading as an inventory management tool. Interdealer trades are more likely to be position reducing than other trades, at higher costs than offsetting with customers. In addition, the concept of a dealer hierarchy is developed, where some floor traders, who generally are more successful, profit from their trades with other dealers. Furthermore, these more successful traders are more likely to use interdealer trading in position reducing trades, which is consistent with the existence of a dealer hierarchy. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:923–944, 2004     

Liquidity and macroeconomic management in emerging markets

Emerging markets have received considerable attention for foreign investment and international diversification due to the possibility of higher earnings and a low level of integration with global equity markets. These high returns often need to be balanced by the high liquidity costs of trading in illiquid emerging markets. Several studies have shown that central bank and government policies are significant determinants of market liquidity. We investigate the influence of monetary and fiscal policy variables on the market and firm level liquidity of eight emerging stock markets of Asia. Using four different (il)liquidity measures and nine macroeconomic variables, we find that changes in the money supply, government expenditure and private borrowing significantly affect stock market liquidity. Illiquidity is also strongly affected by the bank rate, short-term interest rate and government borrowing. We demonstrate that ‘crowding out’ and ‘cost of funds’ effects exist in these markets. Other major findings are that some markets are more sensitive to local macroeconomic news than world factors, the impact on size based portfolios largely depends on the instruments used by the central banks and government, the liquidity of the manufacturing sector is affected by changes in any policy variables, financial institutions are only influenced by monetary policy variables, and the service sector is least affected.     

Insider trading in futures markets: A discussion

“…Every man in the War Department, and the Executive Mansion, who was so situated as to be able to communicate valuable information in advance of the newspaper dispatches was approached by the gold operators, and in most instances an arrangement existed between the former and the latter, for mutual profit.…”     

Liquidity and hedging effectiveness under futures mispricing: International evidence

We analyze the hedging effectiveness of positions that replicate stock indexes using corresponding futures contracts through the application of a dynamic, stochastic hedging strategy proposed by Lafuente, J. A. and Novales, A. (2003). Conclusive gains do not emerge in any of the markets analyzed over the period considered, relative to the use of a constant unit hedge ratio. These findings are consistent with the trend observed in the IBEX 35 futures market study of Lafuente, J. A. and Novales, A. (2003). Our empirical evidence suggests that, contrary to what happens in less liquid markets, the discrepancy between theoretical and quoted prices in index futures contracts in fully developed markets does not represent a noise factor that can be successfully exploited for hedging. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1050–1066, 2009