Futures trading and market microstructure of
the underlying security: A high frequency
experiment at the single stock futures level
Kate Phylaktis and Gikas Manalis
Discussion by
Alfonso Dufour
EMG/ESRC Workshop, Cass Business School
Objective
• To study how the introduction of single stock
futures affects the quality of the underlying spot
market using high frequency data
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Spread
Depth
Information asymmetry
Volatility
Volume
• Previous studies compare pre- and post- futures
listing with lower frequency data and use eventstudy methodologies.
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Motivations
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Policy implications
Information revelation and price discovery
Market integrity and manipulation
Traders believe: 1999’s introduction of futures
market slowed down the cash market
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Predictions
Jones, Kaul and Lipson (1994)
• Non-trading periods:
– periods when exchanges are open
– traders endogenously choose not to trade and quotes are available
• Trading and non-trading periods are similar because :
– Non-trading periods are not predictable, the informationgathering and trading activities are not affected by their ability
to trade
– Both are open markets so production and release of public
information is potentially the same
– Informed trader may move to the more liquid futures market
reducing the asymmetric information risk in the spot market.
– Easier hedging reduces inventory costs in the spot market
• Asymmetric information is the same for trading and non-trading
periods.
• Private information does not play a significant role in driving price
dynamics but public information seems the primary determinant of
volatility.
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More Predictions
• Pan & Poteshman (2003) argue:
“derivative markets may play a dominant role in
the transmission of information for stocks with
less efficient information flow”
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Results
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Futures trading frequency is significantly lower than spot
trading frequency
When futures trade
1. Spot bid-ask spread and depth decrease
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Reduction in the informational asymmetry does not explain this
decrease
2. Volatility and volume of the spot market increase.
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consistent with the idea that institutional traders take simultaneous
positions in both the futures and the underlying market
Evidence does not support the view that spot market quality
increases with the introduction of futures trading
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Methodology
• Single stock futures were introduced in Greece from August
1999.
• 11 futures contracts. 6 of these futures were introduced in
2004 and the sample period corresponds to the first months
of trading. For the other futures the sample period starts
more than 2 years after the introduction of the contract.
– This may lead to different trading dynamics between the two group
of contracts
• The trading day is split into 1 minute periods. Periods with
no trading are classified as non-trading periods.
– How sensitive are the results to the definition of 1 minute periods?
With longer periods we would have a lower number of non-trading
intervals.
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Some Comments
• Account for diurnal periodic effects
• Describe the microstructure of the two markets:
– Are the markets electronic order books? Are there market makers
with market making obligations?
– Any difference in the market structure may be important for the
interpretation of the empirical results.
– Is trading in the spot market concentrated ? (for example see
Anderson (1990))
– In commodity markets, spot market power discourages other
traders’ participation (and hedging) and allows the spot monopolist
to trade strategically in order to manipulate spot prices and make his
futures positions more profitable (Muermann and Shore (2005);
Kumar and Seppi (1992); Spiegel and Subrahmanyam (1992)).
• Do quotes change even with no trading?
– Otherwise, when there is no trading cash volatility and volume are
both zero
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More Comments
• Compare results to the ones obtained by
– JKL (1994) asymmetric information is a small proportion
of quoted spread (between 12% and 15%)
– In this paper asymmetric information 2|Mt+30min-Mt |/Mt
is computed as a proportion of mid-quote prices, Mt
– Shastri, Ramabhadran and Zutter (2008)
• Table 1. What is the market cap of the sample
stocks compared to stocks in the index? This would
give a better idea of the size of these companies.
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Further Comments
Some inconsistencies with the literature
• The quoted depth is lower when futures trade.
– If there is lower inventory risk perhaps we would expect
a greater depth
– Instead perhaps a lower spread and depth could be due to
greater price competition and more aggressive pricing
which is also compatible with larger volume and
volatility.
• Usually, in time series analyses larger volumes are
associated to larger spreads and to greater
likelihood of informed trading.
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References
• Anderson, Ronald W., 1990, Futures Trading for Imperfect
Cash Markets: A Survey, in Commodity, Futures and
Financial Markets, ed. L. Phlips, Kluwer Academic
Publishers, Dordrecht, Netherlands (literature review on
futures trading when the underlying market is imperfectly
competitive)
• Kumar, Praveen and Duane J. Seppi, 1992, Futures
Manipulation with “Cash Settlement”, Journal of Finance,
Vol. 47(4), pp. 1485-1502
• Muermann and Shore (2005) Wharton working paper
• Spiegel, Matthew and Avanidhar Subrahmanyam, 1992,
Informed Speculation and Hedging in a Non-competitive
Securities Market, Review of Financial Studies, Vol. 5(2),
pp. 307-329.
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