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Price Discovery in the Pits: The Role of Market Makers on the CBOT and the Sydney Futures Exchange

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  • Alex Frino
  • Frederick H. deB. Harris
  • Thomas H. McInish
  • Michael J. Tomas III

Abstract

This paper uses the methods of error correction and common factor analysis to estimate the contribution of locals (market makers who may participate directly by trading for their own account) and non‐local traders to price discovery on the floor of the Chicago Board of Trade (CBOT) and the Sydney Futures Exchange (SFE) during a period when open outcry trading was used on both exchanges. We examine these two execution channels for the CBOT's U.S. Treasury bond contract and the SFE's three‐year bonds, ten‐year bonds, ninety‐day bankers' accepted bills, and stock index contracts. For each of the futures contracts, the trade price series of local and non‐local traders are cointegrated. VAR analysis reveals lag structures eight to fifteen trades long in the dynamic adjustment of equilibrium prices in these markets, but time spans of only one to three seconds within synchronous trades. We find evidence of multilateral price discovery by the two execution channels for each of the five contracts. Locals account for 44 to 73% of the price discovery in the four SFE contracts and for 58% of the price discovery in the CBOT's T‐bond contract. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:785–804, 2004

Suggested Citation

  • Alex Frino & Frederick H. deB. Harris & Thomas H. McInish & Michael J. Tomas III, 2004. "Price Discovery in the Pits: The Role of Market Makers on the CBOT and the Sydney Futures Exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(8), pages 785-804, August.
    • Handle: RePEc:wly:jfutmk:v:24:y:2004:i:8:p:785-804
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    Cited by:

    1. Wei-Kuang Chen & Ching-Ting Lin & Cheng-Yi Shiu, 2019. "Price discovery and price leadership of various investor types: evidence from Taiwan futures markets," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 601-631, August.
    2. Alex Frino & Dionigi Gerace & Andrew Lepone, 2008. "Limit order book, anonymity and market liquidity: evidence from the Sydney Futures Exchange," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(4), pages 561-573, December.
    3. Jose Gutierrez & Yiuman Tse, 2009. "NYSE execution quality subsequent to migration to hybrid," Review of Quantitative Finance and Accounting, Springer, vol. 33(1), pages 59-81, July.
    4. Keshin Tswei & Jing‐yi Lai, 2009. "Information contents misjudged: Digressive convergence to equilibrium in cointegrated prices," Review of Financial Economics, John Wiley & Sons, vol. 18(4), pages 183-189, October.
    5. Alex Frino & Stewart Jones & Jin Boon Wong, 2007. "Market behaviour around bankruptcy announcements: evidence from the Australian Stock Exchange," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 47(4), pages 713-730, December.

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