Volatility,Depth, and Order Composition: Evidence from a Pure Limit Order Futures Market

This paper investigates market behaviors (such as volatility, depth, and volume) and order-flow decomposition in a pure limit order futures market, the Taiwan Futures Exchange. The results are different from those in equity markets due to relatively high adverse selection costs in futures markets. We show that a volatility (depth) increase is followed by a depth (volatility) decrease; a market order increase (decrease) subsequently induces higher (lower) volatility; and a limit order increase (decrease) results in more (less) market orders and limit orders. When the upside (downside) volatility rises, buyers decrease (increase) subsequent limit bid orders, and sellers increase (decrease) limit ask orders.     

全球交易所战略合并背景下我国期货结算模式创新研究

独立结算模式和专属结算模式是国际期货市场结算体系的基本模式。在国际期货结算体系的发展实践中,两种模式各有利弊、相互交融、长期共存。随着全球衍生品市场竞争日趋激烈,交易所之间的战略合并成为衍生品市场发展的新趋势。但就期货产品的结算模式而言,专属结算模式成为各个交易所集团共同的选择或发展方向。目前我国期货市场的结算由四家交易所的内设结算部分别进行,随着期货市场创新发展的进一步深入,现行结算模式存在的问题也逐渐显现。建立期货市场独立统一的结算公司或成立交易所控股的结算公司,将是我国期货市场结算模式的路径选择。     

Liquidity Provision of Limit Order Trading in the Futures Market Under Bull and Bear Markets

Abstract:  This study investigates how limit orders affect liquidity in a purely order-driven futures market. Additionally, the possible asymmetric relationship between market depth and transitory volatility in bull and bear markets and the effect of institutional trading on liquidity provision behavior are examined as well. The empirical results demonstrate that subsequent market depth increases as transient volatility increases in bull markets. Market depth exhibits significantly positive relationship to subsequent transient volatility in bull markets. Additionally, although trading volume positively influences transient volatility in bull markets, no such relationship exists in bear markets. Liquidity provision decreases when institutional trading activity intensifies during bear markets. Thus, liquidity provision for limit orders differs between bull and bear markets.     

The effects of oil price shocks on U.S. stock order flow imbalances and stock returns

This paper investigates for the first time the effects of oil demand shocks and oil supply shocks on stock order flow imbalances leading to changes in stock returns. Through the estimation of a structural VAR model, positive oil demand shocks are able to explain almost 36% of the observed variation in the daily average stock order flow imbalances measured by the buy/sell trades ratio; which consequently lead to a negative rather than positive stock returns reaction. In contrast, oil supply shocks exhibit a negative and marginally significant effect on stock order flow imbalances. Our aggregate analysis suggests that positive shocks on stock order flow imbalances are negatively related to stock returns. These effects are stronger for oil-related sectors when compared with the rest of the equities sectors.     

How is Futures Trading Affected by the Move to a Computerized Trading System? Lessons from the LIFFE FTSE 100 Contract

Abstract:  We consider the impact of the May 1999 move to screen trading of the LIFFE FTSE 100 index futures contract. This resulted in a narrowing of the effective spread. Spread determinants are broadly similar in the two regimes. The narrowing of the spread appears due to increased competition among traders and a decline in tick-level volatility rather than to the way these or other variables affect the spread. Market depth appears largely unaffected. Under screen trading, realized spreads widen as more limit orders are taken up rather than in relation to order size per se .     

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.     

Order Imbalance in the FTSE Index Futures Market: Electronic versus Open Outcry Trading

Abstract:  This study examines trading activities before and after the transfer of the FTSE 100 index futures contract from open outcry to electronic trading. Daily order imbalance exhibits strong serial persistence in the electronic limit order market, but not in open-outcry trading. Both excess buying and selling reduce liquidity. In the electronic venue, prior market movements barely affect investors' buying or selling decisions. Excess buy orders do not generate any price impact, but sell orders do. Positive imbalances are more strongly autocorrelated than negative imbalances. No trading elements, such as order imbalance, volume, or open interest, are associated with volatility. Moreover, excess buying decreases volatility. Such evidence suggests that the development and growth of electronic trading has changed the dynamics of trading activities in many important ways.     

Market Response to Liquidity Improvements: Evidence from Exchange Listings

The study examines a sample of 895 stocks that moved from Nasdaq to the New York Stock Exchange or to the American Stock Exchange (Amex) between 1971 and 1994. We show how various measures of liquidity such as the bid‐ask spread, trading volume, and stock price precision improve in somewhat different ways upon transfer to NYSE (Amex). We also find that reductions in trading costs (percentage spread) and in pricing error volatility (Hasbrouck's σ₅) can explain most of stock market's positive response to exchange listing. Thus, liquidity has many facets and cannot be represented by the bid‐ask spread alone.     

Are price limits on futures markets that cool? Evidence from the Brazilian Mercantile and Futures Exchange

This article investigates the impact of price limits on theBrazilian futures markets using high frequency data. The aimis to identify whether there is an ex ante cool-off or magneteffect. For that purpose, we examine a tick-by-tick data setthat includes all contracts on the São Paulo stock indexfutures traded on the Brazilian Mercantile and Futures Exchange(BM&F) from January 1997 to December 1999. The results indicatethat, altogether, there is a dominant cool-off effect in playand that the latter is much stronger for the floor rather thanceiling price. This explains why we observe more hits to theceiling rather than to the floor in our sample despite the factit covers one of the most turbulent periods for emerging markets.We then build a trading strategy that accounts for the cool-offeffect in the conditional mean so as to demonstrate that thelatter has not only statistical but also economic significance.The Sharpe ratio is indeed way superior to the buy-and-holdbenchmarks we consider.     

Limit order book,anonymity and market liquidity: evidence from the Sydney Futures Exchange

This study examines the impact of the removal of broker mnemonics on the Sydney Futures Exchange. Early research finds that a decrease in transparency reduces liquidity in the market, whereas more recent research finds that reduced transparency improves market quality. Results of the present study indicate an improvement in liquidity after the removal of broker mnemonics. There is a significant increase in quoted depth and trading volume, and a significant decrease in quoted spreads in the 90 day Bank Accepted Bill, 3 year Treasury Bond and 10 year Treasury Bond Futures. This improvement in liquidity is robust to the length of the event window around the structural change and trading in a control market.     

Impact of a tick size reduction on liquidity: evidence from the Sydney Futures Exchange

This paper examines the impact of a reduction in the minimum price increment on liquidity and execution costs in a futures market setting. In 2006, the Sydney Futures Exchange halved the minimum tick in the 3 Year Commonwealth Treasury Bond Futures. Results indicate that bid‐ask spreads are significantly reduced after the change. Quoted depth, both at the best quotes and visible in the limit order book, is significantly lower after the tick reduction. Further analysis reveals that execution costs are significantly reduced after the change. We conclude that a tick size reduction improves liquidity and reduces execution costs in a futures market setting.     

Interday and intraday volatility: Additional evidence from the Shanghai Stock Exchange

After examining both the interday and intraday return volatility of the Shanghai Composite Stock Index, it was found that the open-to-open return variance is consistently greater than the close-to-close variance. Examining the volatility of interday returns and variance ratio tests with five-minute intervals reveals an L-shaped pattern, or more precisely, two L-shaped patterns, starting with a small hump during both the morning and the afternoon sessions, with the morning session having a much higher interday volatility than the afternoon session. This L-shaped interday volatility is supported by the similarly shaped intraday volatility pattern. This result suggests that the high volatility of intraday returns for the market open is not entirely due to the trading mechanisms (call auction in the market opening) but also due to both the accumulated overnight information and the trading halt effect. The five-minute breaks after the auction and blind auction procedures are the two major driving forces which exaggerate the high intraday volatility observed at the market open.

Block Trade Price Asymmetry and Changes in Depth: Evidence from the Australian Stock Exchange

This paper examines the price response to large block transactions on the Australian Stock Exchange during the 1999 sample period. We find asymmetry in the price reaction between buyer‐ and seller‐initiated trades with respect to size and resiliency following the trade. We extend previous research by examining order book changes surrounding block trades and relating price effects to changes in book depth. Purchases are associated with persistent order book imbalance, while the sales imbalance is insignificant. Cross‐sectional analysis demonstrates that price resiliency following a trade is related to the speed at which limit orders arrive to replenish book depth.     

The non-linear market impact of large trades: evidence from buy-side order flow

We perform an empirical study of a set of large institutional orders executed in the US equity market. Our results validate the hidden order arbitrage theory proposed by Farmer et al. [How efficiency shapes market impact, 2013] of the market impact of large institutional orders. We find that large trades are drawn from a distribution with tail exponent of roughly 3/2 and that market impact approximately increases as the square root of trade duration. We examine price reversion after the completion of a trade, finding that permanent impact is also a square root function of trade duration and that its ratio to the total impact observed at the last fill is roughly 2/3. Additionally, we confirm empirically that the post-trade price reverts to a level consistent with a fair pricing condition of Farmer et al. (2013 Farmer, D., Gerig, A., Lillo, F. and Waelbroeck, H., How efficiency shapes market impact, 2013. Available online at: http://arxiv.org/abs/1102.5457 [Google Scholar]). We study the relaxation dynamics of market impact and find that impact decay is a multi-regime process, approximated by a power law in the first few minutes after order completion and subsequently by exponential decay.     

Futures and forward price differential and the effect of marking‐to‐market: Australian evidence

The objective of this paper is to examine the effects of marking‐to‐market of futures contracts on the price differential between futures and forward contracts based on the predictions of the Cox, Ingersoll and Ross (1981) (CIR) model. Cox et al ., (1981) derive a series of propositions with respect to the relationship between futures and forward prices and a set of testable implications. These are tested empirically in this paper using Australian data from November 1991 to June 1997. The results provide evidence of the presence of significant futures and forward price differences, where the futures price is consistently below the forward price. Only partial support is found for the Cox et al ., (1981) propositions, implying that the effect of marking‐to‐market is not able to fully account for the price differential. Therefore, it is not possible to rule out the influence of other institutional factors on the futures‐forward price difference.     

Futures and forward price differential and the effect of marking‐to‐market: Australian evidence

The objective of this paper is to examine the effects of marking‐to‐market of futures contracts on the price differential between futures and forward contracts based on the predictions of the Cox, Ingersoll and Ross (1981) (CIR) model. Cox et al ., (1981) derive a series of propositions with respect to the relationship between futures and forward prices and a set of testable implications. These are tested empirically in this paper using Australian data from November 1991 to June 1997. The results provide evidence of the presence of significant futures and forward price differences, where the futures price is consistently below the forward price. Only partial support is found for the Cox et al ., (1981) propositions, implying that the effect of marking‐to‐market is not able to fully account for the price differential. Therefore, it is not possible to rule out the influence of other institutional factors on the futures‐forward price difference.     

The Effects of Trading Methods on Volatility and Liquidity: Evidence from the Taiwan Stock Exchange

This study contrasts the call and continuous auction methods using Taiwan Stock Exchange data. Volatility under the call market method is approximately one-half of that under the continuous auction method. The call market method is more effective in reducing the volatility of high-volume stocks than low-volume stocks. This contradicts conventional wisdom which suggests that the call market method is superior for thinly traded stocks, while the continuous auction method is preferred for heavily traded stocks. The call market method does not impair liquidity and price discovery. The call market appears more efficient than in the continuous auction market.     

The impact of lunchtime closure on market behaviour: evidence from the Sydney Futures Exchange

This paper examines the impact of lunchtime closure on market behaviour. Between May and September, 1994 the Sydney Futures Exchange trialed lunchtime trading. The trial provides a unique natural laboratory experiment for examining the impact of lunchtime closure. The analysis reported in this paper documents abnormally high bid ask spreads, price volatility and trading volume on re‐opening of the market following lunchtime closure. These results confirm that closure has an impact on trading activity, and are consistent with the effects of strategic informed trading, a loss in price discovery and/or trading associated with risk transfer. An abnormal increase in trading volume prior to lunchtime closure is also documented, providing unambiguous evidence of trading activity motivated by risk transfer. Overall these results imply that lunchtime closure disrupts trading activity and reduces market quality by imposing additional costs on market participants.     

The impact of lunchtime closure on market behaviour: evidence from the Sydney Futures Exchange

This paper examines the impact of lunchtime closure on market behaviour. Between May and September, 1994 the Sydney Futures Exchange trialed lunchtime trading. The trial provides a unique natural laboratory experiment for examining the impact of lunchtime closure. The analysis reported in this paper documents abnormally high bid ask spreads, price volatility and trading volume on re‐opening of the market following lunchtime closure. These results confirm that closure has an impact on trading activity, and are consistent with the effects of strategic informed trading, a loss in price discovery and/or trading associated with risk transfer. An abnormal increase in trading volume prior to lunchtime closure is also documented, providing unambiguous evidence of trading activity motivated by risk transfer. Overall these results imply that lunchtime closure disrupts trading activity and reduces market quality by imposing additional costs on market participants.