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

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  • Kevin H. K. Cheng
  • Joseph K. W. Fung
  • Yiuman Tse

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. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:375–398, 2005

Suggested Citation

  • Kevin H. K. Cheng & Joseph K. W. Fung & Yiuman Tse, 2005. "How electronic trading affects bid‐ask spreads and arbitrage efficiency between index futures and options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(4), pages 375-398, April.
    • Handle: RePEc:wly:jfutmk:v:25:y:2005:i:4:p:375-398
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    Cited by:

    1. Liu, Qingfu & Hua, Renhai & An, Yunbi, 2016. "Determinants and information content of intraday bid-ask spreads: Evidence from Chinese commodity futures markets," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 135-148.
    2. Atanasov, Vladimir & Davies, Ryan J. & Merrick, John J., 2015. "Financial intermediaries in the midst of market manipulation: Did they protect the fool or help the knave?," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 210-234.

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