Message Traffic Restrictions and Relative Pricing Efficiency: Evidence From Index Futures Contracts and Exchange-Traded Funds

Abstract

This study examines the impact of message traffic restrictions on the relative pricing efficiency of futures market. In particular, this paper investigates the return correlation between index futures contracts and Exchange-Traded Funds (ETFs) against the implementation of two message traffic regulatory restrictions, namely the Cost Recovery Scheme in Australia (2012) and the Integrated Fee Model in Canada (2012). Evidence indicates that the message traffic regulatory restrictions impose a positive impact on the relative pricing efficiency between futures and equity markets. Results also reveal that the lead-lag relationship between the ETF and futures markets does not change qualitatively after the regulatory transitions.

Keywords: Index futures contracts, Exchange-traded funds, Index arbitrage, Message traffic restrictions