A Brighter Future with Lower Transaction Costs?

Journal of Futures Markets, Vol. 29, 2009

Posted: 18 Aug 2009

See all articles by Lars L. Norden

Lars L. Norden

Stockholm University - Stockholm Business School

Date Written: August 18, 2009

Abstract

Recently, the OMX Nordic Exchange reduced the exchange fee for trading the OMXS 30 index futures with more than 22%. The reduction in exchange fees provides this study with a unique opportunity to investigate the effects of a change in fixed transaction costs on futures market liquidity, trading activity, volatility, futures pricing efficiency, and the futures exchange’s revenues. The results show a ceteris paribus increase in futures trading volume with 19%, a 27% decrease in futures bid-ask spread, and a 27% increase in volatility, as a result of the futures exchange fee reduction, whereas the pricing efficiency of the futures contract and the exchange’s revenues are unaffected by the change in transaction costs. The exchange fee reduction has improved futures market liquidity at the cost of higher volatility. Moreover, the attractiveness and competitiveness of the futures exchange has increased relative alternative trading venues, without a loss of revenues in the process.

Keywords: Futures, Transaction costs, Liquidity, Volatility, Pricing efficiency

JEL Classification: G13

Suggested Citation

Nordén, Lars L., A Brighter Future with Lower Transaction Costs? (August 18, 2009). Journal of Futures Markets, Vol. 29, 2009. Available at SSRN: https://ssrn.com/abstract=1456840

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

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