Trading protocols and price discovery: Implicit transaction costs in Indian single stock futures

Abstract

We show how trading protocols impede the price discovery process in single stock futures as implicit trade costs outweigh explicit costs. Despite the trade volume dominance, trade costs advantage and leverage efficiency in futures markets, single stock futures account for only 35% of the price discovery vis-ávis the spot market. Futures market's informational efficiency is adversely affected by market frictions in the form of marketwide position limits, minimum contract values, and margin requirements. K E Y W O R D S market wide position limits, minimum contract value, single stock futures, trading protocols 1 | INTRODUCTION Between markets in related securities, larger trading volumes are indicative of market focus, concentration, and price discovery (Eun & Sabherwal, 2003). Save for the time value of money, the financial instrument leading price discovery should be random. However, Fleming, Ostdiek, and Whaley (1996) show that the market with the lowest overall trading cost, based on spreads, brokerage, and slippage costs, will react and incorporate information into prices first. Extant research has assessed price informativeness and transaction costs across index futures, index options, and baskets of underlying securities.

Single stock futures and their impact on market quality: Be careful what you wish for

“…Successful cross-market manipulation is made possible by the arbitrage-linked securities. SeeCurran et al (2020) for evidence that the Indian SSFs and spot market exhibit a cointegrated relationship.32 Table 4 also shows a positive relationship between β lnVolatility 10 and spreads, and a negative relationship between β lnTurnover 11 and efficiency.…”

“…The values represent alert instances between January 1, 2018 and December 31, 2019. market manipulation is made possible by the arbitrage-linked securities. SeeCurran et al (2020) for evidence that the Indian SSFs and spot market exhibit a cointegrated relationship.…”