Price Dynamics in the Regular and E-Mini Futures Markets

Abstract

This paper examines the price dynamics in the S&P 500 and Nasdaq-100 index futures contracts. By utilizing transactions data with attached trader type identification codes, we are able to analyze price dynamics for trades initiated by exchange locals and off-exchange customers. The empirical results show that price discovery appears to be initiated in the E-mini index futures contracts and that trades initiated by exchange locals seem to be more informative than those initiated by off-exchange traders. Furthermore, results show that exchange locals appear to make informed trades on the E-mini contracts around large trades that occur on the open outcry floor. We maintain that the exchange locals' ability to observe pit dynamics may contribute toward explaining the price leadership of the Emini contracts. Overall, the results are consistent with the notion that exchange locals are informed traders who derive their informational advantage from the proximity to order flow.

Price Discovery in the Foreign Currency Futures and Spot Market

“…Previous research has also pointed out that a secondary market can take on a essential role in price discovery when that market offers greater anonymity, faster execution, or lower transactions costs, e.g., Huang (2002), Barclay, Hendershott and McCormick (2003), Hasbrouck (2003), and Kurov and Lasser (2004). Over a more recent period in 2006 which is characterized by higher spot market transparency, we see that the spot market dominates price discovery.…”

“…Specifically, informed traders may prefer a satellite market if it offers greater anonymity of trader identity or higher speed of transaction execution. Evidence along these lines is presented in Huang (2002), Barclay, Hendershott and McCormick (2003), Hasbrouck (2003), and Kurov and Lasser (2004). Informed traders might also favor a derivative security traded on a secondary venue if the derivative security has appealing characteristics, such as lower transactions costs or greater leverage.…”

Daytime vs. Overnight Trading in Equity Index Futures Markets

“…Results from the Hasbrouck (1995) information share model confirm that the daytime trades are indeed more informative as compared to their overnight counterparts, thereby providing some preliminary evidence in favor of market segmentation. Kurov et al (2004) argue that exchange locals (trading E-minis) use their proximity to large buy/sell order flow information arriving into the pits and take strategically accurate positions on GLOBEX. In other words, they transfer a substantial chunk of those large floor orders to the GLOBEX platform in order to take advantage of its superior order execution speed, while the information which initiated those large floor orders is still fresh and may be acted upon.…”

“…Massimb and Phelps (1994) report that trading on GLOBEX is quite expensive unless trades occur in large volumes, thereby lowering the average total cost/unit of trade. Kurov et al (2004), further argue that the E-mini traders collectively raise the trading volume on GLOBEX around the time when large orders hit the floor, and they cite this as the main reason for the exponential growth in daytime trading volume on GLOBEX, despite the cost disadvantage as pointed out by Massimb and Phelps (1994). Hence, if the locals trade mostly around large floor orders in order to avoid the high cost of trading on GLOBEX, then there should not be much of an incentive for them to trade during the overnight session when the floor is closed.…”

Microstructure Characteristics of U.S. Futures Markets

“…Previous studies (Pirrong, 1996;Grammig, Schireck, Theissen, 2001;Hasbrouck, 2003;Kurov and Lasser, 2004) compare electronic markets to floor trading (mostly in equities), showing that electronic markets provide anonymity, fast execution and higher information efficiency advantages to traders relative to floor trading.…”