Price Formation and Liquidity Surrounding Large Trades in Interest Rate and Equity Index Futures

66 Pages Posted: 25 Aug 2008 Last revised: 24 Nov 2011

See all articles by James R. Cummings

James R. Cummings

University of Sydney; Centre for International Finance and Regulation (CIFR)

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Date Written: May 2009

Abstract

This paper examines the effects of the direction of trade initiation and trade size on the resiliency of financial futures markets by analysing quote prices, bid-ask spreads and depths. The price and liquidity reactions reveal the unexpected information content of large trades, together with the motivation for exchanging a futures contract. In the market adjustment process, the size of quotes posted by liquidity providers are shown to play a more important role in futures markets than in previous research for equity markets. The liquidity cost of a large futures trade is mainly a pecuniary externality borne by other traders by impairing their continued ability to trade.

Keywords: Financial futures, Block trades, Price impact, Limit order book, Market resiliency

JEL Classification: G13, G14

Suggested Citation

Cummings, James R. and Frino, Alex, Price Formation and Liquidity Surrounding Large Trades in Interest Rate and Equity Index Futures (May 2009). Available at SSRN: https://ssrn.com/abstract=1252782 or http://dx.doi.org/10.2139/ssrn.1252782

James R. Cummings

University of Sydney ( email )

Room 420 Codrington Building H69
University of Sydney, NSW 2006
Australia

HOME PAGE: http://www.sydney.edu.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Alex Frino (Contact Author)

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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