Stock market automation and the transmission of information between spot and futures markets |
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| Institution: | 1. Bilkent University, Faculty of Business Administration, Cankaya, Ankara 06800, Turkey;2. Central Bank of the Republic of Turkey, Markets Department, FX Markets Division, Ulus, Ankara 06050, Turkey;3. Trinity Business School, Trinity College Dublin, Dublin 2, Ireland;4. University of Sydney Business School, University of Sydney, Sydney, New South Wales, Australia;5. Distinguished Research Fellow, Institute of Business Research, University of Economics Ho Chi Minh City, 59C Nguyen Dinh Chieu, Ward 6, District 3, Ho Chi Minh City, Vietnam;1. University of Oxford, United Kingdom;2. Cass Business School, UK;3. Department of Business Administration, Universidad Carlos III, Spain |
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| Abstract: | This paper examines the impact of automated trading in the stock market on the information transmission between the stock and futures markets. This issue is of particular relevance given the trend of exchanges to introduce automated trading. We focus on the Australian market as its institutional features and recent changes in trading systems have created an ideal environment for examining this issue. We initially find evidence of a substantial bidirectional information flow between the stock and futures markets. The paper then focuses on the period surrounding the move by the Australian stock exchange to automated trading. After the introduction of automated trading, we find a significant change in the information transfer process between the two markets. The findings are consistent with the hypothesis that automated trading results in a richer and more timely information set which accelerates the price discovery process. However, the evidence is not overwhelming and alternative explanations exist. |
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