Futures Exchange Innovations: Reinforcement versus Cannibalism

Abstract

Futures exchanges are in constant search of futures contracts that will generate a profitable level of trading volume. In this context, it would be interesting to determine what effect the introduction of new futures contracts have on the trading volume of the contracts already listed. The introduction of new futures contracts may lead to a volume increase for those contracts already listed and hence, contribute to the success of a futures exchange. On the other hand, the introduction of new futures contracts could lead to a volume decrease for the contracts already listed, thereby undermining the success of the futures exchange accordingly. Using a multi-product hedging model in which the perspective has been shifted from portfolio to exchange management, we study these effects. Using data from two exchanges that are different regarding market liquidity (Amsterdam Exchanges versus Chicago Board of Trade) we show the usefulness of the proposed tool. Our findings have several important implications for a futures exchange's innovation policy. * Research support provided by the Niels Stensen Foundation and the Foundation for Research in Derivatives is gratefully acknowledged. The authors express special thanks to R.A. Collins, M.T.G. Meulenberg, D.F. Broens, M. Rockinger, and the faculty of the Office for Futures and Options Research at the University of Illinois at Urbana-Champaign who provided helpful comments on the research project and preliminary versions of this manuscript. We thank Joseph Poncer from the Chicago Board of Trade for providing data on the soybean complex and H. den Hertog from the Amsterdam Exchanges for providing data on the financial futures.