Call Auction Transparency and Market Liquidity: Evidence from China

This paper uses the natural experiment offered by the Shanghai Stock Exchange to investigate the impact of opening call auction transparency on market liquidity. We find that the dissemination of indicative trade information during the pre‐open call auction session leads to an overall improvement in stock liquidity in the continuous trading session. Bid‐ask spreads narrow in the first trading hour because adverse selection risk fell significantly and there is less price volatility in the continuous market. This effect is greater for actively traded securities than illiquid securities. Our findings are robust for different lengths of sample period, different lengths of trading hours after market open, and stocks that had (and had not) reformed the share split structure during our research period.     

The components of bid‐ask spread and their determinants: TAIFEX versus SGX‐DT

This paper compares the intraday components of bid‐ask spread in Taiwan stock index futures traded on Taiwan Futures Exchange (TAIFEX) and Singapore Exchange Derivatives Trading Limited (SGX‐DT). Variables that determine the components of spread are also examined. SGX‐DT uses a floor trading system while TAIFEX uses an electronic call system. This study finds that both information asymmetry and order processing cost components exhibit U‐shaped patterns in the two markets, in contrast to previous findings for U.S. equity markets. Moreover, the information asymmetry components are lower in the TAIFEX relative to the SGX‐DT futures, suggesting that the continuous open outcry markets are more vulnerable to information asymmetry than the electronic call markets. The regression results show that volatility and information are the major determinants of the components while number of trades is not the major determinant of the order processing and information asymmetry components for both markets. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:835–860, 2004     

Trading activity in stock index futures markets: The evidence of emerging markets

This study investigates the trading activity of the Taiwan Futures Exchange (TAIFEX) and Singapore Exchange Derivatives Trading Limited (SGX‐DT) Taiwan Stock Index Futures markets by analyzing the intraday patterns of volume and volatility. In addition, the market closure theory, which may explain such patterns, is examined. Overall, the trading pattern appears to be U‐shaped for the TAIFEX futures and U+W‐shaped for the SGX‐DT. For the SGX‐DT futures, volatility follows the same pattern as that of the number of price changes. For the TAIFEX futures, however, after the peak at the close of the spot market, the volatility in the TAIFEX futures drops consistently until the end of the day while volatility in the SGX‐DT still reaches a smaller peak at the close of the futures market. In addition, a visual inspection of the intraday patterns of these two markets shows that the market closure theory can effectively explain the intraday patterns of these two markets. The empirical results support the market closure theory in that liquidity demand from traders rebalancing their portfolios before and after market closures creates larger volume and volatility at both the open and close. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:983–1003, 2002     

Market microstructure effects on volatility at the TAIFEX

This study examines whether changes in the frequency of market clearing or changes in trading hours on competing exchanges that use different auction systems affect the volatility of futures prices. In particular, this study exploits a natural experiment in the frequency of market clearing of stock index futures contracts traded on the Taiwan Futures Exchange (TAIFEX) to assess whether successive increases in the frequency of market clearing are associated with changes in the volatility of futures prices. The impact of changes in the trading hours on the TAIFEX and on the competing Singapore Exchange (SGX) where a similar Taiwanese stock index futures contract trades under a continuous auction market regime is also examined. The evidence for the impact of an increase in the frequency of market clearing on volatility is mixed. However, the introduction of simultaneous opening times for the TAIFEX (which batches orders at the open) and the SGX (which does not) is associated with a significant reduction in the volatility in SGX Taiwanese stock index futures prices. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:1219–1243, 2007     

Regulatory changes and information competition: The case of Taiwan index futures

This article examines the cross‐border competition in price discovery between the Taiwan Futures Exchange (TAIFEX) and the Singapore Exchange Derivatives Trading (SGX). We focused on the impact of market reforms on the information leadership of similar contracts traded on the two exchanges. Utilizing synchronized transaction data, it was found that reducing the futures transferring tax was the only policy change that enhanced TAIFEX's information role. Evidence supported the trading‐cost hypothesis that a lower transaction cost is associated with better price discovery. A brief linkage between trading volume and price discovery was found when data were broken down into subperiods according to the relative volume of TAIFEX and SGX. Evidence suggested that the SGX's information advantage reported in previous research had diminished as the rival market progressed. It also indicated that exchanges seeking to improve information efficiency should adopt policies that will reduce transaction costs or increase trading volume. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:399–412, 2004     

The relative efficiencies of price execution between the Singapore Exchange and the Taiwan Futures Exchange

Both the Singapore Exchange (SGX) and the Taiwan Futures Exchange (TAIFEX) offer future contracts based on Taiwan's stock‐market indices. TAIFEX reduced the transaction tax from 5 basis points to 2.5 basis points on May 1, 2000. Hence, empirical tests are performed on the differences in trading costs and information transmissions between SGX and TAIFEX for the sample periods both before and after the tax reduction. It is shown that the reduction in the transaction tax greatly improves the efficiencies of price execution. Due to the structural differences between these two markets, the trading costs and speed of information transmissions also are different. The results also provide implications for the relative efficiencies of different market structures. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:173–196, 2002     

Volatility,global information,and market conditions: a study in futures markets

This study examined the behavior of return volatility in relation to the timing of information flow under different market conditions influenced by trading volume and market depth. We emphasized information flow during trading and nontrading periods that may represent domestic and offshore information in the global trading of currencies. Test results show that volatility was negatively related to market depth; that is, deeper markets had relatively less return volatility. Additionally, the effect that market depth had on volatility was superseded by information within trading volume. Test results focusing on the timing of information flow reveal that in low‐volume markets, the volatility of nontrading‐period returns exceeded the volatility of trading‐period returns. However, when trading volume was high, this pattern was reversed and conformed to the observations of earlier articles. Our findings proved to be robust across time, different currency markets, and different measures of return volatility. We also observed a trend toward greater integration between foreign and U.S. financial markets; the U.S. market increasingly emphasized information from nontrading periods to supplement information arriving during trading periods. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:173–196, 2001     

The impact of electronic trading on bid‐ask spreads: Evidence from futures markets in Hong Kong,London, and Sydney

During 1999 and 2000, three major futures exchanges transferred trading in stock index futures from open outcry to electronic markets: the London International Financial Futures and Options Exchange (LIFFE); the Sydney Futures Exchange (SFE); and the Hong Kong Futures Exchange (HKFE). These changes provide unique natural experiments to compare relative bid‐ask spreads of open outcry vs. electronically traded markets. This paper provides evidence of a decrease in bid‐ask spreads following the introduction of electronic trading, after controlling for changes in price volatility and trading volume. This provides support for the proposition that electronic trading can facilitate higher levels of liquidity and lower transaction costs relative to floor traded markets. However, bid‐ask spreads are more sensitive to price volatility in electronically traded markets, suggesting that the performance of electronic trading systems deteriorates during periods of information arrival. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:675–696, 2004     

The Intraday Pattern of Information Asymmetry,Spread, and Depth: Evidence from the NYSE

Studies suggest that investment flows, liquidity imbalances, and institutional trading may create intraday trading patterns and opportunities for investors to time their trades to reduce transaction costs. Motivated by these studies, we divide each trading day into 13 half‐hour trading intervals and measure information asymmetry from price changes, trade sizes, and trade directions. We find that information asymmetry starts high in the morning, drops continuously until it reaches a midday low during Interval 7, rises to a midday high during Interval 10, and drops continuously after. In contrast, neither the spread nor the depth exhibit similar midday extreme values. Essentially, we identify a 90‐min window in the afternoon when net valuable information arrives to the market in high frequency while liquidity is stable, and that may be an opportunity for some investors to time their trades. In addition, we show that market makers employ dynamic strategies that change the spread, the depth, or both to manage information asymmetry. This is particularly evident during the last three trading intervals, where the significant drop in information asymmetry is countered primarily by a significant increase in the depth while the spread is almost constant.     

Reversing the lead,or a series of unfortunate events? NYMEX,ICE, and Amaranth

A number of studies compare the efficiency and transparency of floor trading with automated/electronic trading systems in the competition for order flow. Although most of these studies find that electronic systems lead price discovery, a few studies highlight the weaknesses of electronic trading in highly volatile market conditions. A series of unusual events in 2006, sparking extreme volatility in natural gas futures trading, provide an ideal setting to revisit the resilience of trading system price leadership in the face of high volatility. We estimate time‐varying Hasbrouck‐style information shares to investigate the intertemporal and cross‐sectional dynamics in price discovery. The results strongly suggest that the information share is time‐dependent and contract‐dependent. Floor trading dominates price discovery in the less liquid longer‐maturity contracts, whereas electronic trading dominates price discovery in the most liquid spot‐month contract. We find that the floor trading information share increases significantly with realized volatility. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1130–1160, 2009     

Decimalization,trading costs,and information transmission between ETFs and index futures

The impact of changes in trading costs, due to decimalization, on informed trading and speed of information transmission between exchange‐traded funds (ETFs) and their corresponding index futures is examined. ETFs began to trade in decimals on January 29, 2001, and index futures continued to trade in their original tick sizes. The focus is on whether the decrease in the minimum tick size of ETFs influences the relative performances of these two types of index instruments in the price‐discovery process. It is found that for ETFs, the trading activity increases, but the market depth drops significantly after decimalization. The spreads for ETFs generally decrease, but the adverse selection component of ETF spreads increases. Furthermore, after decimalization, ETFs start to lead index futures in the price‐discovery process and its share of information also increases. Although index futures still assume a dominant role in information discovery, the information content of the ETFs' prices improves significantly after decimalization. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:131–151, 2006     

Are single stock futures used as an alternative during a short‐selling ban?

The response of the single stock futures (SSF) market to a short‐selling ban is investigated. The hypothesis is that traders use SSF as a substitute instrument for short‐selling. A significant increase in SSF trading activity is documented, accompanied by narrower spreads. SSF market volatility did not react during the ban, which suggests that the increased trading activity did not weaken SSF market quality. The quality of the underlying market during the ban period is also assessed, with the results suggesting that changes in SSF market activity had neither positive nor negative effects on the stocks’ liquidity, volatility, and volume.     

证券市场交易机制的国际发展趋势研究

证券市场的两种主要交易机制是竞价方式和做市商制度.文章在综合分析国际上有代表性的相关研究文献后,发现在交易机制与股票买卖价差的关系方面,采用竞价方式的股票其买卖价差较小,采用做市商机制的股票其买卖价差较大;在股票交易成本方面,采用竞价交易机制的股票交易成本较低,而做市商机制的股票交易成本较高.从国际上证券交易机制的发展趋势看,以一种方式为主,多种方式为辅的"混合交易"机制是最有优势的机制,是证券交易机制的未来发展模式.     

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     

Error Reduction in Distributed DSS Through Coordination of Modeling Activities: Simulation Study

It is well known that the “lemon” problem can cause market failure. Because difficulties in quality discovery of nonstandardized and complex products will increase transaction costs, it was predicted that the “electronic market” would prevail only with less complex and more standardized goods. However, it has been observed that there are many successful electronic (auction) markets for seemingly typical “lemon” goods such as used cars, raw minerals, and agricultural products. It is argued that in such markets, the equilibrium price of electronic trading appeared higher than in the nonelectronic market. Many speculative explanations have been offered for this, but to the best of our knowledge, no analytical studies have been presented. This study is an attempt to fill this gap. In this paper, we look at the problem of quality discovery in the electronic trading of physical goods especially when the goods are not standardized. The information asymmetry between buyer and seller creates the possibility of a “lemon” in the nonstandardized market. To mitigate this problem, several auction markets have devised third party quality grading systems and limited auctions to only relatively higher quality products. Through analytical modeling, we rationalize these mechanisms; that is, the intervention of an impartial third party for quality inspection, market segmentation by quality measure, and the sellers' willingness to pay the cost of quality inspection.     

Execution quality in open‐outcry futures markets

This study examines the composition of customer order .flow and the execution quality for different types of customer orders in six futures pits of the Chicago Mercantile Exchange (CME). It is shown that off‐exchange customers frequently provide liquidity to other traders by submitting limit orders. The determinants of customers' choice between limit and market orders are examined, and it is found that higher bid—ask spreads increase the limit‐order submission frequency, and increased price volatility makes limit‐order submission less likely. Effective spreads, trading revenues, and turnaround times for customer liquidity‐demanding and limit orders are also documented. Consistent with evidence from equity markets, the results show that limit‐order traders receive better executions than traders using liquidity‐demanding orders, but incur adverse selection costs. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:1067–1092, 2005     

Information revelation in the futures market: Evidence from single stock futures

This paper analyzes 31 months of data on 137 single‐stock futures (SSFs) traded on OneChicago. The results indicate that on the days they trade, SSFs contribute approximately 24% of the price discovery for underlying stocks. Information revelation in the SSFs market decreases with the ratio of spreads in the futures and the stock markets and the volatility in the stock market. Moreover, the quality of the market for the underlying stocks improves substantially after the introduction of the SSFs market, with the largest improvement occurring on days with SSFs trading. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:335– 353, 2008     

The Effect of Delays in Information Exchange in Electronic Markets

In this research I explored the impact of information delays in a simple model of negotiation through an electronic market system. I found that a market can accurately reflect buyers' and sellers' preferences only if the rate of injection of price information multiplied by the rate of transfer of price information falls between 0 and 2. It is argued that markets adjust themselves to this constraint in practice. The alternatives are to experience chaotic and catastrophic volatility in prices or to go out of operation. Thus, electronic commerce can provide value beyond merely speeding up operations and increasing capacity. It also helps avoid misleading behavior by both buyer and seller and allows markets to operate in a wider range of trading environments.     

Bid‐ask spreads,volatility, quote revisions,and trades of thinly traded futures contracts

We investigate intraday bid‐ask spreads (BAS), volatility, and trading activity of thinly traded equity index futures contracts on the Singapore Exchange. Contrary to previous findings, we find a rather flat BAS pattern during the trading day. However, consistent with past findings, an increase in risk widens the spread and a higher trading activity reduces it. When trading occurs in a day, spreads are reduced. No significant difference in volatility between days with and without trades was detected. When trades occur, quote revisions increase, and it is positively related to the number of trades. An increase in the number of quote revisions increases the likelihood of a transaction, and when quotes are current, revisions that are accompanied by trades carry new information. We provide evidence that contracts that are thinly traded may possess liquidity attributes as long as their price quotes remain current. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:455–486, 2003     

Decreased price clustering in FTSE100 futures contracts following a transfer from floor to electronic trading

The issues of price clustering and electronic trading have triggered important recent debates, and generated interest from regulators due to their potential implications for market quality, stability, and fairness. This paper brings together these issues by examining whether price‐clustering behavior differs following a transfer of futures contracts from open outcry trading to an electronic system. The results are unique in demonstrating a structural change in price clustering following the move to automated trading, with the level of price clustering dropping from around 98.5% of prices at even ticks under floor trading to approximately 75% under electronic trading. Such a change in pricing behavior amounts to a reduction in the effective tick size, and is an important factor in reducing observed bid‐ask spreads. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:647–659, 2003