Trading Protocols and Price Discovery: A Case of Single Stock Futures
20 Pages Posted: 19 Aug 2019 Last revised: 17 Sep 2019
Date Written: August 15, 2019
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: Suggested Citation