Closing the Floor: Evidence of Price Discovery on the Sydney Futures Exchange

Babcock School Working Paper 98-022

Posted: 8 Nov 1998

See all articles by Frederick H. deB. Harris

Frederick H. deB. Harris

Wake Forest University; Capital Markets CRC Limited (CMCRC)

Alex Frino

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

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Date Written: November 1998

Abstract

This paper examines the contribution of local floor traders to price discovery on the Sydney Futures Exchange using the methods of error-correction and common-long-memory components. Four financial instruments (i.e., three-year bonds, ten-year bonds, ninety-day bankers accepted bills, and the stock index) are examined. For each of the futures contracts, the price series of locals' and other brokers' trades are cointegrated. The locals contribute about 40% of the order flow but account for as much as 73% of the price discovery. Error-correction analysis reveals exceptionally long lag structures in the dynamic adjustment of equilibrium prices in these markets. Both locals and other traders error-correct their prices to each other's trades. Locals acting as scalpers may fill a role similar to that of SOES bandits in equity markets. The research has policy implications for floor-closing initiatives and proposals on the London, Sydney, and Chicago futures exchanges and the Toronto Stock Exchange.

JEL Classification: G13, G14, G15

Suggested Citation

Harris, Frederick (Rick) H. deB. and Frino, Alex and McInish, Thomas H., Closing the Floor: Evidence of Price Discovery on the Sydney Futures Exchange (November 1998). Babcock School Working Paper 98-022, Available at SSRN: https://ssrn.com/abstract=139070

Frederick (Rick) H. deB. Harris (Contact Author)

Wake Forest University ( email )

2601 Wake Forest Road
Babcock Graduate School of Management
Winston-Salem, NC 27109
United States
336-758-5112 (Phone)

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Alex Frino

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

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

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