The index futures markets: Is screen trading more efficient?

✍ Scribed by Laurence Copeland; Kin Lam; Sally-Ann Jones

• Publisher: John Wiley and Sons
• Year: 2004
• Tongue: English
• Weight: 350 KB
• Volume: 24
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10119

✦ Synopsis

Abstract

This article uses a nonparametric test based on the arc‐sine law (see, e.g., Feller, 1965), which involves comparing the theoretical distribution implied by an intraday
random walk with the empirical frequency distribution of the daily high/low times, in order to address the
question of whether the abandonment of pit trading has been associated with greater market efficiency. If market
inefficiencies result from flaws in the market microstructure of pit trading, they ought to have been eliminated
by the introduction of screen trading. If, on the other hand, the inefficiencies are a reflection of investor
psychology, they are likely to have survived, unaffected by the changeover. We focus here on four cases. Both the
FTSE‐100 and CAC‐40 index futures contracts were originally traded by open outcry and have moved
over to electronic trading in recent years, so that we are able to compare pricing behavior before and after the
changeover. The equivalent contracts in Germany and Korea, on the other hand, have been traded electronically
ever since their inception. Our results overwhelmingly reject the random‐walk hypothesis both for
open‐outcry and electronic‐trading data sets, suggesting there has been no increase in efficiency
as a result of the introduction of screen trading. One possible explanation consistent with our results would be
that the index futures market is characterized by intraday overreaction. © 2004 Wiley Periodicals, Inc. Jrl
Fut Mark 24:337–357, 2004