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     

After‐hours trading in equity futures markets

Although it is well known that electronic futures data absorb news (slightly) in advance of spot markets the role of the electronic futures movement in out‐of‐hours trading has not previously been explored. The behavior of the 24‐hour trade in the S&P 500 and NASDAQ 100 futures market reveals the important role of these markets in absorbing news releases occurring outside of normal trading hours. Peaks in volume and volatility in this market occur in conjunction with U.S. 8:30 A.M. EST news releases, before the opening of the open‐outcry markets, and in a less pronounced fashion immediately post‐close the open‐outcry market. Price impact in these markets is statistically higher in the post‐close than in the pre‐open periods. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:114–136, 2009     

Trader Survival: Evidence from the Energy Futures Markets

This study analyzes the adaptation of traders and the determinants of trader survival during a period of changing market structures. Our unique sample of transactions level data covers the introduction of electronic trading in the NYMEX energy futures market. The results show that most floor traders adapted to the side‐by‐side electronic and open outcry trading, although trader attrition increased and the profitability of surviving traders declined dramatically. It is also found that trading profits, trader experience and sophistication, and dual trading have a positive effect on the probability of trader survival. Scalpers are less likely to exit trading in pure open outcry trading, but are more likely to fail than traders who hold open positions longer in side‐by‐side trading. Finally, traders trading in multiple energy futures markets and those who use both the exchange floor and electronic trading appear to have a survival advantage in side‐by‐side trading. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:809–836, 2012     

Information transmission in electronic versus open‐outcry trading systems: An analysis of U.S. equity index futures markets

In this article the intraday price discovery process between regular index futures (floor trading) and E‐mini index futures (electronic trading) in the S&P 500 and Nasdaq 100 index futures markets is examined, using intraday data from the introduction of the E‐mini index futures to 2001. Using both information shares (Hasbrouck, J., 1995) and common long‐memory factor weights (Gonzalo, J., & Granger, C. W. J., 1995) techniques, we find that both E‐mini index futures and regular index futures contribute to the price discovery process. However, since September 1998, the contribution made by E‐mini index futures has been greater than that provided by regular index futures. Based on regression analysis, we have also found direct empirical evidence to support the hypothesis that the joint effects of operational efficiency and relative liquidity determine the greater contribution made towards price discovery by electronic trading relative to open‐outcry trading over time. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25: 679–715, 2005     

The index futures markets: Is screen trading more efficient?

This article uses a nonparametric test based on the arc‐sine law (see, e.g., Feller, 1965 ), which involves comparing the theoretical distribution implied by an intraday random walk with the empirical frequency distribution of the daily high/low times, in order to address the question of whether the abandonment of pit trading has been associated with greater market efficiency. If market inefficiencies result from flaws in the market microstructure of pit trading, they ought to have been eliminated by the introduction of screen trading. If, on the other hand, the inefficiencies are a reflection of investor psychology, they are likely to have survived, unaffected by the changeover. We focus here on four cases. Both the FTSE‐100 and CAC‐40 index futures contracts were originally traded by open outcry and have moved over to electronic trading in recent years, so that we are able to compare pricing behavior before and after the changeover. The equivalent contracts in Germany and Korea, on the other hand, have been traded electronically ever since their inception. Our results overwhelmingly reject the random‐walk hypothesis both for open‐outcry and electronic‐trading data sets, suggesting there has been no increase in efficiency as a result of the introduction of screen trading. One possible explanation consistent with our results would be that the index futures market is characterized by intraday overreaction. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:337–357, 2004     

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     

Is it time to reduce the minimum tick sizes of the E‐mini futures?

On the Chicago Mercantile Exchange (CME), so‐called “E‐mini” index futures contracts trade on the electronic GLOBEX trading system alongside the corresponding full‐size contracts that trade on the open outcry floor. This paper finds that the current minimum tick sizes of the E‐mini S&P 500 and E‐mini Nasdaq‐100 futures contracts act as binding constraints on the bid‐ask spreads by not allowing the spreads to decline to competitive levels. We also find that, while exchange locals trade very actively on GLOBEX, they do not tend to act as liquidity suppliers. Taken together, our empirical results suggest that it is time for the CME to consider decreasing the minimum tick sizes of the S&P 500 and Nasdaq‐100 E‐mini futures contracts. A tick size reduction is likely to result in lower trading costs in the E‐mini futures markets. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:79–104, 2005     

Price clustering in E‐mini and floor‐traded index futures

This article sets out to investigate price clustering in both the open‐outcry (floor‐traded) and electronically traded (E‐mini) index futures markets of the DJIA, S&P 500, and NASDAQ‐100 indices. The results show that although price clustering is ubiquitous in both the floor‐traded and E‐mini index futures markets, it nevertheless tends to be higher for open‐outcry index futures, with the clustering in floor‐traded NASDAQ‐100 index futures demonstrating the highest level (97%) at zero digits. A significant increase was also found in price clustering in floor‐traded index futures after the introduction of E‐mini futures trading. The results tend to suggest that those trading mechanisms that involve higher levels of human participation, such as the open‐outcry markets, may well lead to increased incidences of price clustering. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26: 269–295, 2006     

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     

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     

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     

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 impact of a pro‐rata algorithm on liquidity: Evidence from the NYSE LIFFE

This study investigates the impact of introducing a pure pro‐rata algorithm on the liquidity of the market for Euribor futures contracts on NYSE LIFFE. Results indicate that the Euribor market experiences deterioration in liquidity: (1) both best and total depth fall and (2) quoted spreads widen after the structural change. Results also reveal that the Euribor market becomes more active after the event; both trading volume and trade frequency increase substantially after the event. Finally, after the transition, liquidity demanders are more likely to submit smaller market orders. The reduction in depth and increase in quoted spreads suggest that liquidity demanders incur higher trade execution costs after the transition. In contrast, the transition is beneficial for the exchange since trading volume is higher under the new regime. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:660–682, 2012     

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     

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     

Price discovery in bitcoin spot or futures?

In December 2017, both the Chicago Board Options Exchange and the Chicago Mercantile Exchange introduced futures contracts on bitcoin. We investigate to what extent they provide useful information for the price discovery of bitcoin. We rely on the information share methodology of Hasbrouck (1995, J Finance, 50, pp. 1175–1199) and Gonzalo and Granger (1995, J Bus Econ Stat, 13, pp. 27–35) and find that the spot price leads the futures price. We attribute this result to the higher trading volume and the longer trading hours of the globally distributed bitcoin spot market, compared to the relatively restricted access to the US-based futures markets.     

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     

Complements or substitutes? Equivalent futures contract markets—the case of corn and soybean futures on U.S. and Japanese exchanges

This article examines the relationship between corn and soybean futures volumes for contracts traded in the United States and Japan. Because the contract specifications for corn and soybeans futures traded on the Chicago Board of Trade (CBOT), the Tokyo Grain Exchange (TGE), and the Kanmon Commodity Exchange (KCE) are highly similar, the existence of interactions might be expected. Previous research has identified price relationships between these similar contracts. With the advent of agricultural trading on the CBOT's Project A overnight electronic trading system, an overlap of trading times of the U.S. and Japanese exchanges for these commodity contracts resulted. An analysis of TGE and KCE corn and soybean futures volumes indicates that these contracts, rather than acting as substitutes, exhibit a complementary relationship. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:355–370, 2002     

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     

Cash trading and index futures price volatility

This study examines the effect of cash market liquidity on the volatility of stock index futures. Two facets of cash market liquidity are considered: (1) the level of liquidity trading proxied by the expected New York Stock Exchange (NYSE) trading volume and (2) the noise composition of trading proxied by the average NYSE trading commission cost. Under the framework of spline–GARCH with a liquidity component, both the quarterly average commission cost and the quarterly expected NYSE volume are negatively associated with the ex ante daily volatility of S&P 500 and NYSE composite index futures. Conversely, liquidity and noise trading in the cash market both dampen futures price volatility, ceteris paribus. This negative association between secular cash trading liquidity and daily futures price volatility is amplified during times of market crisis. These results retain statistical significance and materiality after controlling for bid–ask bounce of futures prices and volume of traded futures contracts. This study establishes empirical evidence to affirm the conventional prediction of a liquidity–volatility relationship: the liquidity effect is secular and persistent across markets. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:465–486, 2011