Futures Trading and Market Microstructure of the Underlying Security: A High Frequency Experiment at the Single Stock Future Level

34 Pages Posted: 10 Mar 2008 Last revised: 24 Oct 2013

See all articles by Kate Phylaktis

Kate Phylaktis

City University London - Sir John Cass Business School

Gikas Manalis

Hellenic Exchanges Holdings SA

Date Written: March 6, 2008

Abstract

This paper examines the differences in volume, volatility and liquidity during intervals when futures trade with those in which they do not trade using high frequency data. We find that order flow in the cash market increases when futures trade, but at the same time we find volatility to increase too. Although the bid-ask spread is reduced when futures trade, the decomposition of the spread indicates that this is not due to a fall in the adverse selection component, which represents information asymmetries. In fact, the results show that market depth is also reduced when futures trade, which supports the view that the tightening of the spread could be due to a fall in inventory holding costs. This paper has indicated that market quality might not necessarily improve with futures trading.

Keywords: Futures market; market microstructure

JEL Classification: G10, G14

Suggested Citation

Phylaktis, Kate and Manalis, Gikas, Futures Trading and Market Microstructure of the Underlying Security: A High Frequency Experiment at the Single Stock Future Level (March 6, 2008). Available at SSRN: https://ssrn.com/abstract=1103175 or http://dx.doi.org/10.2139/ssrn.1103175

Kate Phylaktis (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 70408735 (Phone)
+44 20 70408881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/k.phylaktis/

Gikas Manalis

Hellenic Exchanges Holdings SA

Athens
Greece

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