This study examines price discovery at the short end of the yield curve by examining the lead–lag relationship in the prices of Australian interest rate swap and bank accepted bill futures contracts. Consistent with previous research, we find strong bidirectional flows of information between swap and futures markets during daytime trading. However, the swap market leads price discovery during overnight trading while futures markets lead swap markets on macroeconomic announcement days—both new findings. We demonstrate and conclude that price discovery in derivatives at the short end of the yield curve is driven by transaction costs.

This study examines the impact of releasing macroeconomic information during trading breaks versus during continuous trading in futures markets. Recently, the Chicago Mercantile Exchange changed its trading hours, while the United States Department of Agriculture changed the release time of its monthly report. These changes provide a natural experiment for assessing the role of trading breaks in futures markets. In this study, price volatility and bid‐ask spreads are found to be abnormally elevated and market depth abnormally low for a longer period during the continuous trading period. Therefore, releasing macroeconomic information during trading breaks in futures markets improves market quality.

In February 2012, the Australian Securities Exchange introduced co‐location services for futures traders, thus providing a natural experiment to test the impact of algorithmic trading (AT) on the speed of adjustment and price discovery during scheduled macroeconomic releases. Our results demonstrate that, in the presence of AT, the speed of adjustment to new information has improved for both exchange‐traded futures and over‐the‐counter‐traded swaps. In addition, we find that the price discovery contribution of the futures market improves in the post‐AT period, with this improvement significant for macroeconomic announcement days.

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