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Structural changes, bid-ask spread composition and tick size in inter-bank futures trading

Listed author(s):
  • Frank McGroarty
  • Owain ap Gwilym
  • Stephen Thomas

This paper studies a period containing three major structural changes, which constitute a natural experiment in the NYSE.Euronext-LIFFE European short-term interest rate (STIR) futures market. These changes comprise (1) a 50% reduction in minimum tick size for the most heavily traded contract, (2) European Monetary Union and (3) the transition from open outcry to electronic trading. We analyse a number of microstructure features of the four largest European interest rate futures contracts throughout this period. In particular, we focus on bid-ask spread composition using a recent model which is appropriate for this market structure. Our analysis identifies the tick size as the largest bid-ask spread component in almost every instance, which suggests that participants in this STIR future market might benefit from a reduction in minimum tick sizes.

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Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 17 (2011)
Issue (Month): 4 ()
Pages: 285-306

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Handle: RePEc:taf:eurjfi:v:17:y:2011:i:4:p:285-306
DOI: 10.1080/1351847X.2010.481465
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