Impact of the Adjustment of Maximum Order Volume on Pricing Efficiency of Stock Index Futures in China

In April 2017, China Financial Futures Exchange adjusted the maximum order volume of single trading in stock index futures, and this paper conducts research on this event. Firstly, it analyzes the influence of the adjustment of maximum order volume on the characteristics of the limit order book with high-frequency data and the impact of ordering situation on the trading depth and volatility of each contract with panel data. Secondly, it takes high-frequency tick-by-tick data to explore the causal relationship between the ordering situation and the probability of informed trading and analyzes the impact of the event on the probability of informed trading. Finally, the dynamic factor analysis method is used to quantify the pricing efficiency based on the probability of informed trading and the characteristics of limit order book, and the influence of the event on the pricing efficiency of stock index futures market is discussed. The results show that the reduction of maximum order volume has different effects on dominant contracts and nondominant contracts of stock index futures. After the event, the overall trading volume of the market increased, where the trading volume of dominant contracts decreased and that of nondominant contracts increased. For dominant contracts, the depth, slope, and liquidity decrease, the spread increases, and the probability of informed trading decreases so that the pricing efficiency becomes worse, while the results of nondominant contracts are the opposite. For Chinese stock index futures market, the pricing efficiency is greatly reduced and the resource allocation capacity is weakened under the influence of the event. Therefore, the adjustment of maximum order volume is not conducive to the healthy development of the stock index futures market. It is suggested that the reduction of the maximum order volume is only implemented for nondominant contracts.