Price limits in futures markets: effects on the price discovery process and volatility

Price limits are actively employed by many futures exchanges as a regulatory mechanism directed at reducing volatility and improving price discovery process. The aim of this paper is to investigate whether price limits achieve these goals without affecting market liquidity for a number of agricultural futures contracts. We employ models of changing volatility in order to show that price limits do not appear to significantly reduce market volatility. In addition, we find evidence confirming the hypothesis that price limits delay price discovery instead of facilitating it. Our results also suggest that the impact of price limits on volatility and price reversals, found in previous studies, are mainly due to the properties inherent to the futures returns, such as volatility clustering. Finally, although trading decreases significantly due to the price limits, traders do not seem to switch from the contracts affected by price limits to other maturities in order to minimize the impact of circuit breakers.     

SLIPPAGE AND THE CHOICE OF MARKET OR LIMIT ORDERS IN FUTURES TRADING

Retail futures traders face uncertainty regarding the price they will obtain when trading. This price "surprise," known as slippage, can be substantial. Using unique data from an introducing brokerage for Chicago Board of Trade (CBOT) wheat, corn, and soybean futures contracts, we quantify time-to-clear and the magnitude of slippage. We then identify factors that affect these trade quality measures. Finally, we analyze individual trader choice between market and limit orders and find that the likelihood of placing limit orders, where regulations protect traders from slippage, is greater when order and market characteristic indicate that adverse slippage is likely.     

Price dynamics in foreign currency futures markets

Nested tests of Samuelson's submartingale and martingale models of price behavior in an efficient futures market find significant autocorrelation at low lags in daily changes of log prices for four of ten currency futures contracts satisfying the assumptions of the statistical tests. Negative serial correlation following large price changes is also found. The analysis controls for bias due to institutional limits on daily price movements. Simulated trading based on out-of-sample forecasts suggests the dependencies probably could be exploited by traders who are members of the futures exchange to earn net profits greatly exceeding buy and hold.     

Who influences the fundamental value of commodity futures in Japan?

We present evidence on the asymmetric information content of six investor groups' transactions in the gold, platinum, gasoline and rubber futures markets on the Tokyo Commodity Exchange. Microstructure theory suggests that traders with superior information regarding the efficient price should be more profitable in the long run. We find that foreign investors have the greatest influence over the efficient price in the gold market, domestic retail investors in the gasoline market and domestic investment funds in the platinum and rubber markets. Differences in the relative influence of investor groups over commodity futures are likely to reflect the degree of contract homogeneity and associated market liquidity. Foreign (domestic retail) investors have larger information shares for the homogeneous liquid (heterogeneous illiquid) contracts than for the heterogeneous illiquid (homogeneous liquid) contracts.     

A new paradigm for forecasting security returns in a market regulated by price limits

Numerous futures markets in the US and many stock markets around the world set a “limit” price before each trading session, based on the settlement price at the end of the previous trading day. Price limits are boundaries set by market regulators to restrict large daily fluctuations in the price of securities. Once the return limit is triggered, traders cannot observe the equilibrium return that would have prevailed in the absence of such regulation. We develop an innovative approach for forecasting security returns (and prices) in a market regulated by price limits. Our forecasting model allows for multiple limit-hits. The model is robust, straightforward and easy for practitioners to use. A few numerical predictions are provided for hypothetical securities, and for seven traded futures contracts.     

Volatility,information, and double versus walrasian auction pricing in US and Japanese futures markets

This study empirically examines volatility in US and Japanese commodity futures markets. The US futures market, COMEX, is double auction with continuous trading, whereas the Japanese futures market, TOCOM, was Walrasian with discrete trading until April 1991. We find intraday volatility for gold futures contracts to be significantly higher on COMEX than TOCOM throughout the sample period and is attributable to differences in information flows and market micro-structures. Evidence is also provided that exchange volume conveys information both within and across markets, which is consistent with the French and Roll, 1986 (French, K.R., Roll, R., 1986. Stock return variances: The arrival of information and the reaction of traders. Journal of Financial Economics 17, 5–26) private-information based rational trading model. Finally, daily variance and autocorrelation estimates within COMEX are consistent with the extant literature on equity markets.     

Walrasian Tatonnement Auctions on the Tokyo Grain Exchange

The Tokyo Grain Exchange (TGE)’s itayose mechanism providesthe opportunity to analyze functioning Walrasian tâtonnementauctions (WTA). In 15,677 auctions conducted over 1997–1998for corn and redbean futures contracts, price formation is unexpectedlysimilar to that observed in continuous double auctions. Provisionalprices and pledges are informative. In contrast to behaviorobserved in experiments, few pledges are deceptive, becausethe traders participate repeatedly and because the auctioneerhas flexibility when changing the provisional price and endingthe auction. Both the risk of the auction ending and the moreequitable dispersion of information increase depth and the speedat which information is embodied in price.     

A theory of price limits in futures markets

The existence of price limits in certain futures markets is explained by demonstrating that price limits may act as a partial substitute for margin requirements in ensuring contract performance. Their effectiveness is a decreasing function of the amount of information available to traders about the equilibrium futures price which is unobservable in the event of a limit move, and the theory predicts that no limits will exist in the markets for financial futures. Actual limits are broadly consistent with the theory.“His interpretation…, plausible as it was, was totally misleading, with the dangerous verisimilitude of a theory which will fit all, or nearly all, the facts, and yet more entirely miss the truth, by a mere accident, then would a frank perplexity.” Heritage, V. Sackville-West     

A Tale of Two Index Futures: The Intraday Price Discovery and Volatility Transmission Processes Between the China Financial Futures Exchange and the Singapore Exchange

This is the first study to examine the intraday price discovery and volatility transmission processes between the Singapore Exchange and the China Financial Futures Exchange. Using one- and five-minute high-frequency data from May to November 2011, the authors find that the Chinese Securities Index 300 index futures dominate Singapore's A50 index futures in both intraday price discovery and intraday volatility transmission. However, A50 futures contracts also make a substantial contribution (26-37 percent) to the price discovery process. These results have important implications for both traders and policymakers.     

Margins and Price Limits in Taiwan's Stock Index Futures Market

This study extends the framework of Brennan (1986) to find the cost-minimizing combination of spot limits, futures limits, and margins for stock and index futures in the Taiwan market. Our empirical results show that the cost-minimization combination of margins, spot price limits, and futures price limits is 7 percent, 6 percent, and 6 percent, respectively, when the index level is less than 7,000. When the index level ranges from 7,000 to 9,000, the efficient futures contract calls for a combination of 6.5 percent, 5 percent, and 6 percent. The optimal margin, reneging probability, and corresponding contract cost are less than those without price limits. Price limits may partially substitute for margin requirements in ensuring contract performance, with a default risk lower than the 0.3 percent rate that is accepted by the Taiwan Futures Exchange. On the other hand, though imposing equal price limits of 7 percent on both the spot and futures markets does not coincide with the efficient contract design, it does have a lower contract cost and margin requirement (7.75 percent) than that without imposing price limits (8.25 percent).     

金融双语

股指期贷 股票指数期货（简称＂股指期货＂）是一种在未来某特定时间以特定价格买卖某种股票指数价值的合约.     

Why derivatives on derivatives? The case of spread futures

Recently, calendar spread futures, futures contracts whose underlying asset is the difference of two futures contracts with different delivery dates, have been successfully introduced for a number of financial futures contracts traded on the Chicago Board of Trade. A spread futures contract is not an obvious financial innovation, as it is a derivative on a derivative security: a spread futures position can be replicated by taking positions in the two underlying futures contracts, both of which may already be quite liquid. This paper provides a motivation for this innovation, demonstrating how the introduction of spread futures can, by changing the relative trading patterns of hedgers and informed traders, affect equilibrium bid–ask spreads, improve hedger welfare, and potentially improve market-maker expected profits. These results are robust both to allowing serial correlation of asset price changes, and investor preference for skewness.     

Trading around macroeconomic announcements: Are all traders created equal?

This paper examines the effects of macroeconomic announcements on equity index markets using high frequency transactions data for the regular and E-mini S&P 500 index futures contracts. For ten types of announcements that significantly affect prices, we analyze the price adjustment process and the trading patterns of exchange locals and off-exchange customers around the announcements. We find a large increase in trading activity immediately after the announcement. The results also show that during this initial surge in trading activity, locals are able to time their trades better than off-exchange traders even when locals do not have the advantage of access to the order flow. The trading strategy followed by exchange locals in the first 20 seconds after the announcement tends to be profitable, while off-exchange traders tend to make losing trades over the same time period. These results lend evidence that local traders tend to react to the macroeconomic information faster than off-exchange traders.     

Constant-collateral pyramiding trading strategies in futures markets

This paper introduces constant-collateral pyramiding trading strategies, which can be implemented in the futures markets. For these strategies, expressions are derived for effective constraints on the number of futures contracts in the trader’s portfolio and on the trader’s wealth. Implications of the results are drawn regarding the degree of pyramiding adopted by a subgroup of noise traders who underestimate the probability of receiving a margin call when they engage in positive feedback strategies. Suggestions are made regarding how market regulators can use margin requirements to encourage these traders to adopt less aggressive pyramiding strategies.     

Excess demand and price formation during a Walrasian auction

We conduct a detailed analysis of the relationship between excess demand and the convergence of price to equilibrium during a real-world Walrasian auction, paying special attention to the size and speed of the price adjustment. Using data from the Tokyo Grain Exchange (TGE), we first show that because auctions for the various futures contracts occur sequentially, information becomes more evenly dispersed across traders as an auction sequence progresses. Then we show that excess demand is positively correlated with both the eventual price change and the speed with which price adjusts. As information becomes more evenly dispersed, the strength of these relationships weakens. Finally, though excess demand explains a large proportion of the variability of the change in price, it explains only a small proportion of the variability of the speed of adjustment.     

Who trades bitcoin futures and why?

Using regulatory data with identifiers, we analyze the traders active in the Bit- coin futures (BTC) contracts traded on the Chicago Mercantile Exchange (CME). We find two primary trader types, those who hold almost exclusively BTC (con- centrated traders) and those who hold BTC to diversify a broader futures portfolio (diversified traders). The prevalence of these two types changes over time. We also study how BTC markets are connected to other futures markets through common holdings of BTC traders. Finally, we analyze the micro BTC contract and find that the trader composition is different than that of the full-size contract.     

Price limit performance: evidence from transactions data and the limit order book

In recent years, organized stock exchanges with daily price limits adopted wider limits as narrower limits were criticized for jeopardizing market efficiency. This study examines the impact of a wide price limit on price discovery processes, using data from the Kuala Lumpur Stock Exchange. Specifically, examined is the impact of daily price limits on (i) information asymmetry; (ii) arrival rates of informed traders; and (iii) order imbalance. Using both trade-to-trade transaction data and the limit order book, we compile evidence that price limits do not improve information asymmetry, delays the arrival of informed traders, and exacerbates order imbalance. These results suggest that price limits on individual securities do not improve price discovery processes but impose serious costs even when the limit band is as wide as 30%.     

期货市场的交易量与价格波动

本文检验了美国期货市场WTI原油、S＆P500指数和10年期国债品种的日内、日间价格波动与日内交易量、隔日交易量之间的关系,发现预期的日内和隔日交易量都有平抑期货市场价格波动的作用,非预期的隔日交易量与期货价格波动之间有正相关关系,非预期的目内交易量对价格波动的影响不显著。从信息对称性的角度分析,预期的交易量中含有更多信息,能抑制期货价格的偏离;非预期的交易量主要由信息反馈者提供,他们往往对期货价格的变动做出过度反应,从而加剧价格波动。     

An examination of the relationship between the disposition effect and gender,age, the traded security,and bull–bear market conditions

We analyze how gender and age, internal characteristics of retail futures traders—one that remains fixed while the other changes over a lifetime—and the security being traded and bull–bear market conditions, two external factors, are related to the disposition effect by separately tracking their trade-by-trade transaction histories over a period of close to six years on the Taiwan Futures Exchange (TAIFEX). We show that women and mature traders, compared with their male and younger counterparts, exhibit a stronger disposition effect. The effect is also stronger among traders who trade financial-sector futures contracts than among those who trade electronic-sector futures contracts. We further demonstrate that a bear market sees a stronger disposition effect.     

A Likelihood Ratio Test of Price Volatilities: Comparing Stock Index Spot and Futures

This paper uses three methods to estimate the price volatility of two stock market indexes and their corresponding futures contracts. The classic variance measure of volatility is supplemented with two newer measures, derived from the Garman-Klass and Ball-Torous estimators. A likelihood ratio test is used to compare the classic variance measure of price volatilities of two stock market indexes and their corresponding futures contracts during the bull market of the 1980s. The stock market volatilities of the Standard & Poor's 500 (S&P 500) and New York Stock Exchange (NYSE) indexes were found to be significantly lower than their respective futures price volatilities. Since information may flow faster in the futures markets than in the corresponding stock market, our results support Ross's information-volatility hypothesis. It was also noted that the NYSE spot volatility was lower than the S&P 500 spot volatility. If the rate of information flow and firm size are positively related, then the lower NYSE spot volatility is explained by the size effect. The futures price volatilities for the two indexes were insignificantly different from each other. With stock index spot-futures price correlations approaching unity, one implication of our results for index futures activity is that smaller positions in futures contracts may suffice to achieve hedging or arbitrage goals.