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
Date Written: May 2009
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: Suggested Citation