| The objective of this research is to examine how electronic trading affects the intraday price discovery process in the equity index futures market. At the Chicago Mercantile Exchange (CME), exchange floor and electronic trading mechanisms exist side-by-side, offering essentially identical equity index futures contracts. E-mini index futures are traded in an electronic trading system and the standard index futures are traded in an open-outcry trading system at the CME. This research aims to see where price determination occurs and how the price discovery process differs over time in S&P 500 and Nasdaq 100 index futures markets. In this study intraday data on the spot index, index futures, and E-mini index futures are used. Three time series techniques (vector error correction model (VECM), the common long memory component weight (Gonzalo and Granger 1995) and the information shares (Hasbrouck 1995)) are employed to measure the contribution of information transmission process by each of these three indices. The results of the Granger causality tests under VECM suggest that E-mini index futures lead the standard index futures and the standard index futures lead the spot index and there are feedback effects among them. The results of both the information shares (Hasbrouck 1995) and the common long memory component weight (Gonzalo and Granger 1995) analyses also suggest that each of these three indices contribute to the price discovery process but, since the middle of 1999 E-mini index futures contracts have dominated the price discovery in comparison either to the standard index futures or the spot index in these two equity index derivatives markets. All three techniques produce consistent results, indicating the robustness of our empirical results. We then present the hypotheses regarding the factors that could affect the extent of price discovery in the E-mini futures relative to the standard futures. Our pooled regression model results support the hypotheses that price discovery is (a) positively related to the relative market share of E-mini futures trading and also (b) positively related to the spread difference between the standard futures and E-mini futures trading. |
