The Index Futures Markets: Is Screen Trading More Efficient?

21 Pages Posted: 5 Oct 2001

See all articles by Laurence Copeland

Laurence Copeland

Cardiff University - Cardiff Business School

Sally Anne Jones

Cardiff University - Cardiff Business School

Kin Lam

Hong Kong Baptist University (HKBU)

Date Written: September 2001

Abstract

This paper uses a nonparametric test based on the Arc-Sine Law (see e.g. Feller (1965)), which involves comparing the theoretical distribution implied by an intraday random walk with the empirical frequency distribution of the daily high/low times, in order to address the question of whether or not the abandonment of pit trading has been associated with greater market efficiency. If market inefficiencies result from flaws in the market microstructure of pit trading, they ought to have been eliminated by the introduction of screen trading. If, on the other hand, the inefficiencies are a reflection of investor psychology, they are likely to have survived, unaffected by the changeover. We focus here on four cases. Both the FTSE-100 and CAC-40 index futures contracts were originally traded by open outcry and have moved over to electronic trading in recent years, so that we are able to compare pricing behaviour before and after the changeover. The equivalent contracts in Germany and Korea, on the other hand, have been traded electronically ever since their inception. Our results overwhelmingly reject the random walk hypothesis both for open outcry and electronic trading datasets, suggesting there has been no increase in efficiency as a result of the introduction of screen trading. One possible explanation consistent with our results would be that the index futures market is characterised by intraday overreaction.

Keywords: index futures; Arc-Sine Law; overreaction

JEL Classification: C4, G1

Suggested Citation

Copeland, Laurence S. and Jones, Sally Anne and Lam, Kin, The Index Futures Markets: Is Screen Trading More Efficient? (September 2001). Available at SSRN: https://ssrn.com/abstract=286154 or http://dx.doi.org/10.2139/ssrn.286154

Laurence S. Copeland (Contact Author)

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 20875740 (Phone)
+44 29 20874419 (Fax)

Sally Anne Jones

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Kin Lam

Hong Kong Baptist University (HKBU) ( email )

Department of Finance and Decision Sciences Renfrew Road
Kowloon
HONG KONG
00 852 2339 5007 (Phone)
00 852 2339 5585 (Fax)

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