Trading Protocols and Price Discovery: A Case of Single Stock Futures

20 Pages Posted: 19 Aug 2019 Last revised: 17 Sep 2019

See all articles by Edward Curran

Edward Curran

Macquarie University - Faculty of Business and Economics; Rozetta Institute

Jack Hunt

Independent

Vito Mollica

Macquarie Graduate School of Management; Capital Markets CRC Limited (CMCRC); Macquarie University, Macquarie Business School

Date Written: August 15, 2019

Abstract

We analyse the equity stocks and single stock futures of the National Stock Exchange of India (NSE) to analyse how trading protocols affect information efficiency, measured by price discovery. Our results indicate that price discovery occurs in the spot market compared to the derivative market. Hasbrouck’s (1995) Information Share measurement for price discovery shows the spot market represents 62% of the information while the futures market contributes 38%. We also analyse the price discovery with Gonzalo and Granger’s (1995) Component Share, with stronger results than Information Share for the spot market, 68%, than the futures market, 32% indicating that the spot market leads in the informational efficiency regardless of the price discovery metric.

We show that the some of the strongest explanatory variables that inhibit the futures market are a market wide position limit, lot size, margin requirements per lot and wider spreads than the spot market. We also show that lagged indicators of price discovery in a market also contribute to the spot market’s informational efficiency.

Keywords: price discovery, single stock futures, equity, trade protocols

JEL Classification: G13, G14

Suggested Citation

Curran, Edward and Hunt, Jack and Mollica, Vito, Trading Protocols and Price Discovery: A Case of Single Stock Futures (August 15, 2019). Available at SSRN: https://ssrn.com/abstract=3437845 or http://dx.doi.org/10.2139/ssrn.3437845

Edward Curran (Contact Author)

Macquarie University - Faculty of Business and Economics ( email )

Sydney, New South Wales 2109
Australia

Rozetta Institute ( email )

Sydney

Jack Hunt

Independent

No Address Available
United States

Vito Mollica

Macquarie Graduate School of Management ( email )

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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