Trades or quotes: Which drives price discovery? Evidence from Chinese index futures markets

Abstract

In this paper, we analyze the role that trades and quotes play in price discovery. Based on tick-level data for CSI 300 stock index futures, we find that the contribution of quotes to price discovery does not differ from trades at low resolutions, but dominates at high resolutions. This difference is influenced by spreads and volume. Further analysis reveals that the intraday price contribution of quotes and trades is trending downward, up to 31% in the first half-hour. The adverse selection and liquidity supply cost components of spreads significantly contribute to and dampen the difference in intraday contribution, respectively.