Three essays on international futures markets




Ning, Zi

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My dissertation examines the trading dynamics of futures contracts in two different contexts: the traditional open-outcry (floor) market versus the newly-emerged electronic market. It contains three chapters.

Chapter One studies the effects of competition for the gold and silver futures products traded in three different venues: Commodities Exchange (COMEX) open outcry, electronic COMEX, and the electronic Chicago Board of Trade (CBOT) markets. The electronic COMEX saw an immediate surge and steady increase in market share, while market portions of the electronic CBOT and open outcry COMEX dropped consistently. The market quality for both electronically traded full-sized and mini-sized contracts is superior to that of their pit-traded counterparts. Despite its shrinking volume share, the electronic CBOT has comparable market quality conditions to the electronic COMEX. Such results suggest that a transparent electronic limit order market enhances market quality overall.

Chapter Two explores trading activities before and after the transfer of the FTSE 100 index futures contract from open outcry to electronic trading. Daily order imbalance exhibits strong serial persistence in the electronic limit order market, but not in open-outcry trading. Both excess buying and selling reduce liquidity. In the electronic venue, prior market movements barely affect investors' buying or selling decisions. Excess buy orders do not generate any price impact, but sell orders do. Positive imbalances are more strongly autocorrelated than negative imbalances. No trading elements, such as order imbalance, volume, or open interest, are associated with volatility. Moreover, excess buying decreases volatility. Such evidence suggests that the development and growth of electronic trading has changed the dynamics of trading activities in many important ways.

Chapter Three investigates the daily and intradaily relation between returns and the trading of exchange locals and off-exchange customers for the floor-traded regular index futures and the electronically traded E-mini index futures in the S&P 500 and NASDAQ 100 index futures markets. In two regular index futures markets, the intradaily analysis shows that exchange locals are largely contrarians while off-exchange customers (mainly institutional investors) engage in positive feedback trading. In the two E-mini index futures markets, the daily and intradaily analysis shows that both exchange locals and off-exchange customers (mainly small traders and speculators) are contrarians. In the E-mini index futures markets, the daily order imbalances for both exchange locals and off-exchange customers have the predictive power for subsequent returns. In the regular index futures markets, we do not find the evidence of return predictability on the daily level. There is a strong contemporaneous positive relation between trading activity and daily returns. An intradaily analysis reveals that such a relation is primarily driven by intradaily price pressure.


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