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     

Returns and volatility in the Kuala Lumpur crude

This article investigates the determinants of daily returns and volatility in the Kuala Lumpur crude palm oil futures market over the period 1980 to 1994. We find significant evidence of month and open interest effects in returns and also find strong evidence of daily, monthly, yearly, volume and open interest effects in volatility when ARCH/ GARCH models are used to estimate volatility. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:985–999, 1998     

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     

Economic uncertainty,trading activity,and commodity futures volatility

This paper investigates the dynamics of commodity futures volatility. I derive the variance decomposition for the futures basis and show unexpected excess returns result from new information about expected future interest rates, convenience yields, and risk premia. Measures of uncertainty in economic conditions have significant predictive power for realized volatility of commodity futures returns, after controlling for lagged volatility, returns, commodity index trading, hedging pressure, and other trading activity, even during the so-called “index financialization” period. During this period, hedge fund performance predicts volatility in grain commodities, which are affected by the US ethanol mandate.     

Intraday volatility in the bond,foreign exchange,and stock index futures markets

Intraday volatility for the Eurodollar, the Euro/dollar foreign exchange rate, and the E‐mini S&P 500 futures contracts traded on a continuous 23‐hour schedule on the Chicago Mercantile Exchange Globex electronic platform is studied. Volatility transmission in a single market across different regions is mainly explained by intraregion volatility (heat waves); interregion volatility (meteor showers) plays a secondary role. The joint impact of liquidity variables such as volume and open interest on volatility is also analyzed. Volume tends to increase volatility, but open interest does not affect it. The results are explained by the type of trading venue. Unlike floor‐based trading systems, in electronic markets open interest does not seem to provide additional information on market liquidity and its relation to volatility beyond any information contributed by volume. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:313– 334, 2008     

The information content of option implied volatility surrounding the 1997 Hong Kong stock market crash

This study examines the information conveyed by options and examines their implied volatility at the time of the 1997 Hong Kong stock market crash. The author determines the efficiency of implied volatility as a predictor of future volatility by comparing it to other leading indicator candidates. These include volume and open interest of index options and futures, as well as the arbitrage basis of index futures. Using monthly, nonoverlapping data, the study reveals that implied volatility is superior to those variables in forecasting future realized volatility. The study also demonstrates that a simple signal extraction model could have produced useful warning signals prior to periods of extreme volatility. These results indicate that the options market is highly efficient informationally. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:555–574, 2007     

Stock index futures trading and volatility in international equity markets

This article examines stock market volatility before and after the introduction of equity‐index futures trading in twenty‐five countries, using various models that account for asynchronous data, conditional heteroskedasticity, asymmetric volatility responses, and the joint dynamics of each country's index with the world‐market portfolio. We found that futures trading is related to an increase in conditional volatility in the United States and Japan, but in nearly every other country, we found either no significant effect or a volatility‐dampening effect. This result appears to be robust to model specification and is corroborated by further analysis of the relationship between volatility, trading volume, and open interest in stock futures. An increase in conditional covariance between country‐specific and world returns at the time of futures listing is also documented. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:661–685, 2000     

Volatility and trading demands in stock index futures

In this study we examine how volatility and the futures risk premium affect trading demands for hedging and speculation in the S&P 500 Stock Index futures contracts. To ascertain if different volatility measures matter in affecting the result, we employ three volatility estimates. Our empirical results show a positive relation between volatility and open interest for both hedgers and speculators, suggesting that an increase in volatility motivates both hedgers and speculators to engage in more trading in futures markets. However, the influence of volatility on futures trading, especially for hedging, is statistically significant only when spot volatility is used. We also find that the demand to trade by speculators is more sensitive to changes in the futures risk premium than is the demand to trade by hedgers. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:399–414, 2003     

Market microstructure of FT-SE 100 index futures: An intraday empirical analysis

This article examines the market microstructure of the FT-SE Index futures market by analyzing the intraday patterns of bid-ask spreads and trading activity. The patterns are remarkably different from those of stock and options markets because of the futures market's open outcry system with frenzied scalpers/short-term marketmakers. Spreads are stable over the day, but decline sharply at the close and increase when U.S. macroeconomic news is distributed. Traders actively trade at the open with narrow spreads and large trade sizes. Volatility and volume have higher values at the open and close and when U.S. news is released. The overall results suggest that information asymmetry in the index futures market is insignificant, and traders find it easy to control inventory. The results are also broadly consistent with the Grossman and Miller (1988) model that describes liquidity as the price of transaction demand for immediacy. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 31–58, 1999     

The pricing of stock index futures spreads at contract expiration

This paper conducts an empirical analysis of the mispricing of calendar spreads for stock index futures. Using recent data drawn from the Sydney Futures Exchange, a sharp increase in the magnitude of spread mispricing immediately prior to maturity of the near contract is documented. This pattern in mispricing is related to a sharp decline in open interest in the near contract and an increase in open interest in the deferred contract. Further, the direction of mispricing of the near and deferred contracts are more likely to move in opposite directions as the near contract approaches maturity. These findings are consistent with the hypothesis that traders seeking to roll‐over their positions from near to deferred futures contracts close to maturity increase the magnitude of spread mispricing. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:451–469, 2002     

Implied volatility forecasts in the grains complex

This article finds that the implied volatilities of corn, soybean, and wheat futures options 4 weeks before option expiration have significant predictive power for the underlying futures contract return volatilities through option expiration from January 1988 through September 1999. These implied volatilities also encompass the information in out‐of‐sample seasonal Glosten, Jagannathan, and Runkle (GJR;1993) volatility forecasts. Evidence also demonstrates that when corn‐implied volatility rises relative to out‐of‐sample seasonal GJR volatility forecasts, implied volatility substantially overpredicts realized volatility. However, simulations of trading rules that involve selling corn option straddles when corn‐implied volatility is high relative to out‐of‐sample GJR volatility forecasts indicate that none of the trading rules would have been significantly profitable. This finding suggests that these options are not necessarily overpriced. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:959–981, 2002     

An empirical examination of the SIMEX Nikkei 225 futures contract around the Kobé earthquake and the Barings Bank collapse

This study examines the levels and interrelationships of volatility, volume, open interest and effective bid-ask spread on the Nikkei 225 futures contract on SIMEX. The sample chosen is critical; conclusions regarding the effect of the Kobé earthquake of January 1995 and the resulting collapse of Barings Bank in February 1995 can be uncovered. The analysis uses graphs of the levels of the variables and an assessment of the variables using a vector autoregression and impulse response functions. Volume and open interest temporarily increased, whereas the increase in effective bid-ask spread is more permanent. This seems to be due to the sensitivity that each of the variables develops to volatility as a result of these information shocks. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 1–29, 1999     

Open interest,cross listing,and information shocks

This study examines the characteristics and behavior of the demand for hedging, proxied by open interest, for the cross‐listed Euribor futures contract traded at Euronext‐LIFFE and Eurex. The study is unique in its investigation of the simultaneous determinants of open interest in a cross‐listed setting. It also assesses the impact of shocks on traders' demand for hedging and shows how the 9/11 terrorist attacks and the credit crunch influence the level of dependency between Euronext‐LIFFE and Eurex. Differences of opinion, ECB Governing Council meetings, days of the week, contract maturity, illiquidity, and volatility are investigated as potential determinants of open interest. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:755–778, 2011     

Market volatility and the demand for hedging in stock index futures

This study examines the relation between stock market volatility and the demand for hedging in S&P 500 stock index futures contracts. Open interest is used as a proxy for hedging demand. The analysis employs unique data that identify separately the open interest of large hedgers, large speculators, and smaller traders. Volatility estimates are decomposed into expected and unexpected components, to assess whether traders’ reactions to volatility depend upon its predictability. Results indicate that daily open interest for hedgers increases when unexpected volatility increases. Increases in unexpected volatility may cause hedgers to raise their estimates of future expected volatility, and hence increase their demand for hedging. Open interest of speculators is not related to expected volatility, and is only weakly related to unexpected volatility. The increase in the participation of hedgers in periods of higher volatility is significantly larger than the increase in the participation of speculators. The results suggest that increases in stock market volatility increase the demand for hedging. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20: 105–125, 2000     

论中国利率市场化进程与利率期货的推出

中国利率市场化的进程正在有步骤地加速推进,利率的市场化必然带来利率波动幅度的加大,如果没有有效的利率风险管理工具作为配套机制,必然会影响利率市场化的顺利进展,也影响到整个金融市场应有作用的发挥.发达国家的经验表明,利率市场化要求利率期货作为利率风险管理的机制予以配合,因此,在推进中国利率市场化的进程中应研究推出利率期货交易的问题.利率期货的最主要承载体是国债期货.根据中国目前利率市场化进展的实际情况,从各类经济实体已经或可能面临的利率风险看,对国债期货的需求日渐强烈.本文的主旨是,在论述中国利率市场化进程中,分析各类经济实体所面临的各种利率风险,以及国债期货对于这一风险管理所起的应有作用,从而得出应当推出国债期货的结论.     

Volume and Volatility Surrounding Quarterly Redesignation of the Lead S&P 500 Futures Contract

During the last weeks before each quarterly expiration of Standard & Poor's (S&P) 500 futures, the bulk of trading volume begins to shift away from the next‐to‐expire (nearby or lead) contract toward the second‐to‐expire (next out) contract. At some point, the exchange formally redesignates the next out as the new lead contract, and the next out replaces the nearby in the futures pit location designated for the lead contract. This event invariably results in a dramatic increase (decrease) in trading activity in the next out (nearby) contract. This shift in relative trading volumes is due to the microstructure of the futures exchange rather than new information or underlying volatility conditions. The event thus offers us an opportunity to examine how volatility responds to noninformation‐based exogenous changes in volume. This study examines the volatility behavior of nearby and next out S&P 500 futures contracts on the 10 days surrounding quarterly redesignation of the lead contract. Our model measures possible changes in (a) the level of volatility and/or (b) the association between volume and volatility after redesignation of the lead contract. Results indicate that when we account for the association between volume and volatility, the higher volume lead contract consistently experiences a lower level of volatility. This outcome supports the view that the larger population of liquidity providers who trade the more active lead contract fosters greater market depth and lower volatility. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1119–1149, 2001     

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     

Risk arbitrage opportunities in petroleum futures spreads

This article investigates the long-term pricing relationship among crude oil, unleaded gasoline, and heating oil futures prices, and finds that these commodities futures prices are cointegrated. The study finds that the spreads between crude oil and its end products are stationary. Furthermore, this article investigates the risk arbitrage opportunities in three types of popularly traded petroleum futures spreads and finds that historically profitable risk arbitrage opportunities existed and were statistically significant. However, one cannot be certain that these opportunities still exist. The research also finds that moving averages are valid test variables for measuring spreads. Statistical and tabular constructions are used to illustrate findings. © 1999 John Wiley & Sons, Inc., Jrl Fut Mark 19: 931–955, 1999     

The effect of futures trading on the distribution of spot index returns: Implications for CVaR in the Spanish market

There is extensive empirical research on the potential destabilizing effects of futures trading activity on spot market volatility. Rather than just focusing on spot volatility, the authors deal with the contemporaneous relationship between futures trading volume and the overall probability distribution of spot market returns. Empirical evidence using intraday data from the Spanish stock index futures market over the period 2000–2002 is provided. Their findings reveal that the density function of spot return conditional to spot volume depends on unexpected futures trading volume.     

Clustering in the futures market: Evidence from S&P 500 futures contracts

We document trade price clustering in the futures markets. We find clustering at prices of x.00 and x.50 for S&P 500 futures contracts. While trade price clustering is evident throughout time to maturity of these contracts, there is a dramatic change when the S&P 500 futures contract is designated a front‐month contract (decrease in clustering) and a back‐month contract (increase in clustering). We find that trade price clustering is a positive function of volatility and a negative function of volume or open interest. In addition, we find a high degree of clustering in the daily opening and closing prices, but a lower degree of clustering in the settlement prices. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:413–428, 2004