The Effects of Margin Changes on the Composition of Traders and Market Liquidity: Evidence from the Taiwan Futures Exchange

Abstract

We examine the effects of margin changes on futures trading activity, the composition of traders, and market liquidity using an account‐level data set from the Taiwan Futures Exchange. We find that margin increases reduce trading activity for all trader types, which indicates that higher margins increase trading costs. Institutional trading is more sensitive to changes in margin requirements than individual traders. This, in turn, leads to increases in market price volatility and decreases in market liquidity. These results imply that margin requirements are not an effective policy tool for limiting the trading activity of noise speculators to reduce market volatility. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 35:894–915, 2015

A parsimonious parametric model for generating margin requirements for futures

“…Margins may affect different futures markets in different ways, because the balance between speculators and hedgers varies. The empirical study in Chou et al (2015) finds that day traders on the Taiwan Futures Exchange are less sensitive to market traders than institutional investors. Another empirical study by Daskalaki and Skiadopoulos (2016) compares the effects of margin changes on commodity futures, currencies, equity and interest rates.…”

Time‐series momentum in China's commodity futures market

“…The dominance of speculative trading seems to be a common phenomenon observed in Asia's emerging futures markets. Many recent studies report the dominance of speculative trading in the Asian futures markets, including the Korean and Taiwanese futures markets (Atilgan, Demirtas, & Simsek, ; Chou, Wang, & Wang, ; Han, Hwang, & Ryu, ; Lee, Lee, & Ryu, ; Ryu, , , ; Webb, Ryu, Ryu, & Han, ), which are closely related to the Chinese futures markets in terms of geography, trading activities, and investor compositions.…”