How electronic trading affects bid-ask spreads and arbitrage efficiency between index futures and options (original) (raw)
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Effects of electronic trading on the Hang Seng Index futures market
International Review of Economics & Finance, 2005
This paper investigates the effects of the migration of the Hang Seng Index futures from open-outcry trading to electronic trading. Using trade data over a window of six months we find evidence that, after the migration, the bid-ask spread of the futures contract decreases and the contribution of the futures price in information transmission increases. Furthermore, the asymmetry in volatility spillover reduces and the open interests of the futures market become smaller. These results suggest that the anonymity in trading and the higher speed of order execution in the electronic trading system attract informed traders to the futures market and increase the information flow.
Price efficiency in futures and spot trading: The role of information technology
Electronic Commerce Research and Applications, 2010
During the last years information technology has had a profound impact on financial markets. The speed of trading and the amount of available information has increased substantially. Nearly all exchanges have upgraded their trading systems to meet the demand of investors and enhance their competitive position. However, the impact on liquidity and price efficiency remains unclear. In this paper we present an event study to examine the effects of an infrastructure change at the Deutsche Börse in Germany. On April 23, 2007, Deutsche Börse released an upgraded version of their electronic trading system Xetra. We study the impact that this upgrade had on the efficiency of prices, measured as the pricing gaps between the observed futures prices and their theoretical values based on the underlying cash market. Our results suggest that the system upgrade reduced the pricing gapand thus improved price efficiency.
This paper provides the box spread test of the SET50 index options market efficiency using daily data from October 29, 2012, through March 30, 2016. The results show that the market frictions imposed by the bid-ask spread, along with brokerage commissions, exchange fees, and interest on initial margin deposit, appear to have a significant effect on arbitrageurs' abilities to take advantage of the mispricing of the box spreads. When using bid-ask prices rather than closing prices, the box spread arbitrage opportunities drop to <1%, and none of them is persisted on the following trading day. Considering transaction costs, the results therefore confirm the internal options market efficiency in the SET50 index options market. However, the results do not provide support for the argument that the SET50 index options market efficiency improved over time.
2011
The objective of this paper is to analyze the interrelationship between the all share, gold and industrial indexes of the Johannesburg Stock Exchange and the corresponding index futures contracts traded on the South African Futures Exchange after the introduction of electronic trading. For the all share and industrials contracts, we find quicker information transmission between the spot and futures markets after the introduction of electronic trading. In addition, the contemporaneous correlation between the markets increases and the size and asymmetry of the volatiltiy spillovers is reduced. For the gold contract, we find slower information transmission after the introduction of electronic trading, but this result may be biased by the fact that the gold contract was discontinued.
Efficiency of single-stock futures: An intraday analysis
Journal of Futures Markets, 2008
Using intraday bid-ask quotes of single-stock futures (SSFs) contracts and the underlying stocks, the pricing and informational efficiency of SSF traded on the Hong Kong Exchange are examined. Both the SSFs and the stocks are traded on electronic platforms. The market microstructure and the data obviate the problems of stale and non-executable prices as well as uncertain bid-ask bounce of the thinly traded futures contracts. Nominal price comparisons show that more than 80% of SSF quotes are inferior to stock quotes. More than 99% of the observed futures spreads are above one stock tick compared with only 2% of those for stocks. After adjusting for the cost-of-carry, however, SSFs are fairly priced. Given higher stock trading costs, non-members should even find the futures attractively priced. Thus, the absence of competitive market maker does not bias prices so as to discourage trading. SSF quotes also account for one-third of price discovery despite their low volume.
SSRN Electronic Journal, 2000
The behaviour of limit order quotes and trading activity are studied using a unique and rich database that includes the identity of market participants from a fully automated derivatives market. The analysis is performed using transactions records for three aggregated trader types and three trade identifiers, with trades stamped in milliseconds for the SXF, the equity futures contract of the Montreal Exchange. The identifiers distinguish trades between principals; agency based trades, as well as transactions that are conducted for risk management as opposed to speculative purposes. Agency related trades are shown to represent the largest amount of trading activity relative to other account types. Over 90% of trades in this electronic market are limit orders. The limit order book, especially the depth 1 order, has a dominant role in providing liquidity and in explaining market participants' trading behaviour. Participants in the SXF reference their trades to the best limit order depth. Hence, investors with large positions or investors who want to build a large position have to strategically split large orders to close/build their position, according to the depth of the best limit order, to ameliorate price impact and information leakage effects. In addition, the results show that traditionally measured spreads have no relationship with trading costs.
Floor versus Electronic Trading of Government Bond Futures
This paper analyses the impact of a transition from open outcry to electronic trading in the UK Long Gilt futures market. Price clustering behaviour is not materially affected, but there is an increased concentration of large trades at more popular prices. After automation, narrower bid-ask spreads tend to be associated with relatively smaller trades. There is a substantial reduction in mean trade size as reduced-depth orders become trades. The mean daily number of transactions and quotations increases substantially, which is entirely consistent with static volumes and decreased mean trade size. Bid-ask spreads widen significantly after automation, which is largely accounted for by the finding that spreads under electronic systems demonstrate an increased sensitivity to price volatility. This effect is accentuated by increased volatility after automation.