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The Split of the S&P 500 Futures Contract: Effects on Liquidity and Market Dynamics

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  • Karagozoglu, Ahmet K
  • Martell, Terrence F
  • Wang, George H K

Abstract

The Chicago Mercantile Exchange reduced the size of its S&P 500 futures contract when it reduced the multiplier from 500 to 250 and increased the minimum tick from 0.05 to 0.10 on November 3, 1997. This is a rare major change in a very successful contract's specifications. We analyze effects of this change on liquidity and market dynamics in both a univariate and a multivariate context. The main contribution of this study is the use of multiple intervention analysis with various dynamic response functions to examine the effects of the split while taking into account several other major market events surrounding it. A multivariate analysis is also used to test the impact of the split using a structural model of liquidity and market dynamics. Empirical findings offer limited support for the hypotheses that smaller contract size resulted in smoother trading, and that more public customers trade the S&P 500 futures contract following its split. We observe a reduction in the average transaction size as well as a temporary narrowing of the bid-ask spreads, but no significant change in volatility that can be attributed to the split. We do not find any significant and lasting impact on other liquidity and market variables. Copyright 2003 by Kluwer Academic Publishers

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  • Karagozoglu, Ahmet K & Martell, Terrence F & Wang, George H K, 2003. "The Split of the S&P 500 Futures Contract: Effects on Liquidity and Market Dynamics," Review of Quantitative Finance and Accounting, Springer, vol. 21(4), pages 323-348, December.
    • Handle: RePEc:kap:rqfnac:v:21:y:2003:i:4:p:323-48
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    Citations

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    Cited by:

    1. Smales, Lee A., 2016. "Trading behavior in S&P 500 index futures," Review of Financial Economics, Elsevier, vol. 28(C), pages 46-55.
    2. Vinay Datar & Raymond So & Yiuman Tse, 2008. "Liquidity commonality and spillover in the US and Japanese markets: an intraday analysis using exchange-traded funds," Review of Quantitative Finance and Accounting, Springer, vol. 31(4), pages 379-393, November.
    3. Bjursell, Johan & Frino, Alex & Tse, Yiuman & Wang, George H.K., 2010. "Volatility and trading activity following changes in the size of futures contracts," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 967-980, December.
    4. Boyarchenko, Nina & Larsen, Lars & Whelan, Paul, 2020. "The Overnight Drift," CEPR Discussion Papers 14462, C.E.P.R. Discussion Papers.
    5. Kentaka Aruga, 2014. "An intervention analysis on the Tokyo Grain Exchange non-genetically modified and conventional soybean futures markets," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-11, December.
    6. Anirban Banerjee & Ashok Banerjee, 2020. "Does trade size restriction affect trading behavior? Evidence from Indian single stock futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 355-373, March.
    7. Wang, Nanying & Houston, Jack, 2015. "An intervention analysis on the relationship between futures prices of non-GM and GM contract soybeans in China," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196842, Southern Agricultural Economics Association.

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