Abstract
This study investigates the determinants of trading volume in the futures markets and focuses on underlying market characteristics as an explanation for futures trading volume. Four major futures contracts traded on the Sydney Futures Exchange are investigated: the stock price index (SPI); the 90-day bank accepted bill (BAB); the 3-year bond; and the 10-year bond. An important outcome of this study is an identification of the fundamental drivers of trading volume in the futures markets, which have largely gone undocumented in prior research. We find evidence that futures trading volume is related to underlying market characteristics: the size of the Australian superannuation fund investments in equities (for the SPI), short term treasury notes (for the BAB), non-government bonds on issue (for the 3-year contract) and government bonds on issue (for the 10-year contract).
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Notes
See Karpoff (Karpoff 1987) for an excellent survey of these two competing hypotheses.
ITC data are captured on-line in real-time from SYCOM and are disseminated instantaneously to quote vendors such as Bloomberg and Reuters.
The trading volume of these four contracts is about 98 percent of the total trading volume in SFE. See, 2000 Australian Financial Markets Report: Overview, Australian Financial Markets Association (AFMA).
The trading volume includes the volume of options on futures.
The actual figures used to calculate these growth rates are available upon request.
Open interest is a variable that has been commonly used as a proxy for the investors’ demand to trade. However, this variable is not used in this study because open interest represents the willingness of both hedgers and speculators to risk assets. Since most speculators are short-term traders, their trading activity is difficult to predict from a long-term perspective. The macroeconomic variables examined in this study represent fundamental demand from underlying markets, which are more likely to represent the long-term “drivers” of trading in these futures contracts.
Source: Reserve Bank of Australia, Bulletin, Table E. 5, issue 2001, and AFMA-SIRCA, Australian Financial Markets Report 2001.
The percentage bid-ask spread is calculated as the difference between the bid and ask prices divided by the bid-ask midpoint.
Only observations in the daytime trading session are used to calculate the bid-ask spread and return volatility matrixes. During the sample period (1 January 1992 to 31 December 1999), trades executed in the night trading session accounts for <1% of the total volume for the four futures contracts.
An extensive number of studies have documented the existence of the maturity effect on futures prices and volumes (i.e., Grammatikos and Saunders 1986; Galloway and Kolb 1996), but few studies have explored its impact on bid-ask spreads. Given the close relationships between bid-ask spreads, trading volume and return volatility, a dummy variable is added into the spread Eq. 2 to account for any impact of the maturity month on bid-ask spreads.
Another possible test could be testing the exogeneity of one of the two variables under the assumption that the other variable is exogenous. But this has effectively been tested in the previous Hausman test.
The equations are also estimated by changing the lag values of the Newey-West kernel from lag 1 to lag 8, and the results are very similar to those reported here.
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Acknowledgments
This research was funded by an Australian Research Council Collaborative Grant (No. C59700105) involving the Sydney Futures Exchange. We gratefully acknowledge the helpful comments of the people at the Securities Industry Research Centre of Asia-Pacific (SIRCA) as well as the participants at the workshop held by the Research and Development Division of the Sydney Futures Exchange.
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Frino, A., Jarnecic, E. & Zheng, H. Activity in futures: does underlying market size relate to futures trading volume?. Rev Quant Finan Acc 34, 313–325 (2010). https://doi.org/10.1007/s11156-009-0132-0
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DOI: https://doi.org/10.1007/s11156-009-0132-0