The Relative Efficiencies of Price Execution between Singapore Exchange and Taiwan Futures Exchange

Abstract

Both Singapore Exchange (SGX) and Taiwan Futures Exchange (TAIFEX) offer future contracts based on the Taiwan stock market indices. Due to the structural differences between these two markets, the trading costs and speed of information transmissions are likely to be different. Since TAIFEX reduced transaction tax from 5 basis points to 2.5 basis points on May 1, 2000, we empirically test the differences in trading costs and information transmissions between SGX and TAFEX for the sample periods both before and after the tax reduction. We show that the reduction in market frictions such as taxes have a great impact on the relative efficiencies of price execution. The implicit trading costs reduced significantly and the price execution efficiencies also improved significantly after the tax reduction on TAIFEX. Our results also provide implications for the relative efficiencies of different market structures. As our empirical results show, an order driven market, such as TAIFEX, is likely to provide traders with better price execution because of the larger base of market participants and less costs of intermediation.

Keywords: Index Futures, Trading Cost, Market Structure, Information Transmission

JEL Classification: G14; G15