How electronic trading affects bid-ask spreads and arbitrage efficiency between index futures and options

Kevin H.K. Cheng, Joseph K W FUNG, Yiuman Tse*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Citations (Scopus)

Abstract

This paper examines the impact of switching to electronic trading on the relative pricing efficiency of Hang Sang Index futures and options contracts traded on the Hong Kong exchange. The study is motivated by the recent shift in 2000 from the pit to an electronic trading platform. Electronic trading leads to lower bid-ask spreads and less price clustering than floor trading in both the options and futures markets. Mispricing between futures and options drops significantly after the change. Quicker correction of mispricing indicates a significant improvement in dynamic inter-market arbitrage efficiency with electronic trading.

Original languageEnglish
Pages (from-to)375-398
Number of pages24
JournalJournal of Futures Markets
Volume25
Issue number4
DOIs
Publication statusPublished - Apr 2005

Scopus Subject Areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance
  • Economics and Econometrics

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