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     

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     

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     

Trading Mechanisms and Market Quality: Call Markets versus Continuous Auction Markets

On July 29, 2002, the trading mechanism in the Taiwan Futures Exchange (TAIFEX) was switched from an exclusive call market to a continuous auction market. Based upon several proxies of market quality, in the present study, we set out to empirically examine whether this switch has resulted in any significant improvement in market quality within the TAIFEX. We find that while the quoted spreads, effective spreads, and price volatility are all smaller in the continuous auction market, the call auction market exhibits greater market depth and smaller pricing errors; the latter is also found to be more effective in resolving the problem of information asymmetry. Overall, the results of the present study suggest that the choice between call and continuous auction trading mechanisms essentially involves trade‐offs between the bid‐ask spread, market depth, price volatility, information asymmetry costs, and price efficiency.     

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     

The contribution of a satellite market to price discovery: Evidence from the Singapore exchange

The Singapore Exchange (SGX), a small satellite market, successfully competes with a large home market, the Osaka Securities Exchange (OSE), in trading the Nikkei 225 futures index. In this paper, we investigate the contribution of the SGX to price discovery and shed light on the reasons for its continued success. Evidence is provided from information revelation and price discovery of three competing but informationally linked markets of the Nikkei 225 index—domestic spot (Tokyo Stock Exchange), domestic futures (OSE), and foreign futures (SGX), which represents the satellite market. Overall, the futures market contributes 77% to price discovery, with the satellite market contributing 42% of the futures and 33% of the total price discovery. These figures, surprisingly, far exceed the satellite market's share of trading volume. Support is provided for the extended trading hours on the SGX for three of the four non‐overlapping trading sub‐periods. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:981–1004, 2004     

A brighter future with lower transactions costs?

Recently, the OMX Nordic Exchange reduced the exchange fee for trading the OMXS 30 index futures with more than 22%. The reduction in exchange fees provides this study with a unique opportunity to investigate the effects of a change in fixed transaction costs on futures market liquidity, trading activity, volatility, futures pricing efficiency, and the futures exchange's revenues. The results show a ceteris paribus increase in futures trading volume with 19%, a 27% decrease in futures bid–ask spread, and a 27% increase in volatility, as a result of the futures exchange fee reduction, whereas the pricing efficiency of the futures contract and the exchange's revenues are unaffected by the change in transaction costs. The exchange fee reduction has improved futures market liquidity at the cost of higher volatility. Moreover, the attractiveness and competitiveness of the futures exchange has increased relative alternative trading venues, without a loss of revenues in the process. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:775–796, 2009     

A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts

Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE‐100 Index futures and the FTSE‐100 European index options contracts. This study uses the put–call–futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time‐stamped transaction data. This study allows for realistic trading and market‐impact costs. The feasibility of strategies such as execute‐and‐hold and early unwinding is examined with both ex‐post and ex‐ante simulation tests that take into consideration possible execution time lags for the arbitrage trade. This study reveals that the occurrence of matched put–call–futures trios exhibits a U‐shaped intraday pattern with a concentration at both open and close, although the magnitude of observed mispricings has no discernible intraday pattern. Ex‐post arbitrage profits for traders facing transaction costs are concentrated in at‐the‐money options. As in other major markets, despite important microstructure differences, opportunities are generally rapidly extinguished in less than 3 min. The results suggest that arbitrage opportunities for traders facing transaction costs are small in number and confirm the efficiency of trading on the London International Financial Futures and Options Exchange. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:31–58, 2002     

The intra‐day price discovery process between the Singapore Exchange and Taiwan Futures Exchange

This paper focuses on the increasing competition between exchanges for listing similar index futures contracts and the impact this has on information dissemination between various markets. Specifically, using both the Hasbrouck and Gonzalo–Granger methodologies for extracting the information content held in each market, a comparison of information efficiencies between the Singapore Exchange and the Taiwan Futures Exchange is examined for Taiwan Index Futures listed in both markets. The results show not only a common stochastic trend between index futures and their underlying indices, but also provide strong evidence to suggest price discovery primarily originates from the Singapore futures market. There are direct implications of this result for both financial exchanges and traders—in particular, that traders realize price determination can arise from both futures markets, and the need for exchanges to maintain a reputation as an information center for these similarly traded financial instruments. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 219–240, 2002     

Returns on ADRs and arbitrage in emerging markets

In this paper we compare the distributions of ADR returns and the returns of the locally traded shares between Chile and Argentina. This comparison is interesting because both countries are emerging economies with a similar free market orientation and the trading hours in both countries virtually coincide with the trading hours in New York. Argentina and Chile differ, however, in two important aspects: During our sample period: (1) The Argentinean market was completely under a fixed-exchange rate system, while Chile maintained a flexible exchange rate regime; and (2) Argentina did not impose any restrictions on foreign investments, while Chile did. We find that the return distributions of the Chilean ADRs are significantly different from the distributions of the returns on the respective underlying Chilean shares. While the mean returns are the same, the return's S.D. are significantly different. In contrast, the hypothesis that the distributions of the returns on the Argentinean ADRs and the returns on their respective underlying shares are the same cannot be rejected. We then use a threshold model to estimate the transaction costs of trading the ADRs and the locally traded shares. We find that the transaction costs that must be added to the returns spread before arbitrage is possible were between 100 and 200 basis points for Chilean ADRs. It was between 66 and 165 basis points for the Argentinean ADRs. The daily return spread reversion caused by arbitrage activities was estimated to be approximately 30% for Chilean ADRs and 40% for Argentinean ADRs. Finally, we cannot reject the hypothesis that low liquidity was a major factor in the cost difference between the two countries.     

Adverse selection costs: A study on the Chinese stock market

Employing a bid-ask spread model applicable for order-driven market, this paper decomposes the bid-ask spread of Shanghai Stock Exchange (SSE) into adverse selection and order processing cost components to investigate the relationship between the components of bid-ask spread and order size. It examines the impacts of firm size, price, trading activeness, and volatility on adverse selection cost, and explores the intraday pattern of adverse selection costs and informative trading. Results show that adverse selection costs increase with trade scale. However, order processing costs do not exhibit the economies of scale. Stocks of large firms, which are high-priced and actively traded, have relatively low adverse selection costs; stocks with large volatility have relatively high adverse selection costs. Moreover, this paper finds that the adverse selection component of bid-ask spread in the Chinese stock market exhibits an L-shaped intraday pattern, which implies that heavy trading around market opening is dominated by informative trading, while heavy trading near market closing is dominated by liquidity trading.     

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.     

Optimal No‐Arbitrage Bounds on S&P 500 Index Options and the Volatility Smile

This article shows that the volatility smile is not necessarily inconsistent with the Black–Scholes analysis. Specifically, when transaction costs are present, the absence of arbitrage opportunities does not dictate that there exists a unique price for an option. Rather, there exists a range of prices within which the option's price may fall and still be consistent with the Black–Scholes arbitrage pricing argument. This article uses a linear program (LP) cast in a binomial framework to determine the smallest possible range of prices for Standard & Poor's 500 Index options that are consistent with no arbitrage in the presence of transaction costs. The LP method employs dynamic trading in the underlying and risk‐free assets as well as fixed positions in other options that trade on the same underlying security. One‐way transaction‐cost levels on the index, inclusive of the bid–ask spread, would have to be below six basis points for deviations from Black–Scholes pricing to present an arbitrage opportunity. Monte Carlo simulations are employed to assess the hedging error induced with a 12‐period binomial model to approximate a continuous‐time geometric Brownian motion. Once the risk caused by the hedging error is accounted for, transaction costs have to be well below three basis points for the arbitrage opportunity to be profitable two times out of five. This analysis indicates that market prices that deviate from those given by a constant‐volatility option model, such as the Black–Scholes model, can be consistent with the absence of arbitrage in the presence of transaction costs. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:1151–1179, 2001     

Market structure,liquidity, and information based trading at the Prague Stock Exchange

This paper investigates the relation between liquidity and information based trading and the possible impact of market microstructure changes on this relationship. A model similar in spirit to that of [Easley et al. (1996b) J. Financ. 51(3) (1996) 811–833] is used to determine how often new information occurs and how it influences the composition of orders submitted to the market. There have been several major market structure changes implemented by the Prague Stock Exchange (PSE) over the past 5 years. Thanks to its unique development path, where a given set of stocks were subjected to several changes in trading environment design, PSE trading data can be used to examine how market conditions impact the extent of informed trading and market liquidity.     

The effect of multiple listings on the bid–ask spread in option markets: The case of Montreal Exchange

In this article, we examine the effect of multiple listings of options on their bid–ask spread, by comparing options contracts listed only on the Montreal Exchange with those interlisted on that exchange and on a U.S. exchange as well. Using a statistical procedure adapted to panel data and two models for the determination of the bid–ask spread, we find that the bid–ask spreads of Montreal options interlisted in U.S. markets are narrower than those of non‐interlisted options. That advantage tends to disappear, however, with an increase in option price and to increase with its volatility, but is not affected by the volume of transactions in the option market. The analysis also shows that interlisting may result in time lags in the convergence of quotes between Montreal and the U.S. markets. Moreover, our evidence shows that with interlisting, volume shifts to the option market where trading in the underlying security is concentrated, irrespective of the location where the option was first introduced. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:939–957, 2002     

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 impact of off‐market trading on liquidity: Evidence from the Australian options market

This study investigates the impact of reducing the contract size threshold for off‐market trading on transaction costs in an options market. This study provides evidence that market makers compete more aggressively for small‐to‐medium trades and quote mid‐size depths more often after the regime change. Results also indicate that small‐to‐medium trades incur lower transaction costs; however, large trades that are executed on the central limit order book do not benefit from the structural transition. Given recent frictions imposed by regulators on equity markets, these results suggest that options markets provide an effective means for investors to replicate short‐selling in underlying securities. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:361–377, 2010     

Technical Analysis Profitability Without Data Snooping Bias: Evidence from Chinese Stock Market

We perform a comprehensive analysis on the profitability of a large number of technical analysis based trading rules in Chinese stock market. To counter data snooping bias, we employ a stepwise superior predictive ability test to identify genuinely profitable trading rules among more than 28,000 technical signals. Using 19 years of daily data on Chinese aggregate stock market return, we find substantial evidence on the profitability of technical trading rules measured by either the market timing ability or Sharpe ratio gain. Our results on the profitability of technical rules hold during different subperiods and remain valid under the presence of transaction costs.     

Transaction Costs and Market Quality: Open Outcry Versus Electronic Trading

On May 10, 1999, the London International Financial Futures and Options Exchange (LIFFE) transferred trading in the Financial Times Stock Exchange (FTSE) 100 Index futures contracts from outcry to LIFFE CONNECT, its electronic trading system. We find lower spreads in the electronic market after the transition. However, the open outcry mechanism has higher market quality (or smaller variance of the pricing error) on the basis of Hasbrouck's (1993) model. Furthermore, employing the Hasbrouck (1991) model, we show that trades in the open outcry market have higher information content. Inventory control considerations also affect the electronic market more than the open outcry market. The overall results suggest that electronic trading should complement, but not replace, open outcry in futures markets. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21: 713–735, 2001     

Flight-to-liquidity: Evidence from China's stock market

In an order-driven and strictly regulated stock market, illiquidity risks' effects on asset pricing should be highlighted, particularly in such extreme market conditions as those in China. This paper utilizes panel data from China's stock market in an attempt to answer whether the illiquidity risk in various dimensions—including price impacts, the transaction speed, trading volume, transaction costs, and asymmetric information—can explain stock returns. We find that almost all dimensions of stock illiquidity are positively associated with excess stock returns. More importantly, smaller, less-liquid stocks suffer more liquidity costs, providing a strong evidence for “flight-to-liquidity.” Additionally, the transaction costs and asymmetric information, denoted by bid-ask spreads, robustly account for these illiquidity effects on stock pricing and differ from the findings in the U.S. market. We also find that the “flight-to-liquidity” can partially explain the idiosyncratic volatility puzzle, investors' gambling, and herding psychologies. This study provides substantial policy implications in regulation and portfolio management for emerging markets.