Single Stock Futures and Their Impact on Market Quality: Be Careful What You Wish For

Abstract

The impact of derivatives is almost invariably measured by the liquidity outcomes on the underlying. We explore the relationship between efficiency, fairness and derivatives with respect to the underlying. We provide evidence that the presence of a derivative improves liquidity in the underlying but decreases the degree of fairness - proxied by manipulation likelihood. Our study highlights that a leveraged derivative entices manipulation in the underlying and that typical inhibitors to manipulation, namely high visible execution costs, are in fact desirable.

Keywords: market manipulation, single stock futures, spot market, bid-ask spread

JEL Classification: G13, G14