Reversing the Lead, or a Series of Unfortunate Events? NYMEX, ICI and Amaranth

Abstract

In comparing trading platforms, most studies suggest that electronic systems lead price discovery, except perhaps in excessively volatile markets. A series of unusual events in 2006, sparking extreme volatility in natural gas futures trading, provide an ideal setting to revisit the resilience of trading system price leadership in the face of excessive volatility. We estimate time-varying Hasbrouck-style information shares to investigate the intertemporal and cross-sectional dynamics in price discovery. The results strongly suggest that the information share is time-dependent and contract-dependent. We find that the floor trading information share increases significantly with realized volatility.

Keywords: price discovery, trading platforms, natural gas derivatives

JEL Classification: G13