Structural changes, bid-ask spread composition and tick size in inter-bank futures trading


McGroarty, Frank, ap Gwilym, Owain and Thomas, Stephen (2011) Structural changes, bid-ask spread composition and tick size in inter-bank futures trading. European Journal of Finance, 17, (4), 285-306. (doi:10.1080/1351847X.2010.481465).

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Description/Abstract

This paper studies a period containing three major structural changes, which constitute a natural experiment in the NYSE.Euronext-LIFFE European short-term interest rate (STIR) futures market. These changes comprise (1) a 50% reduction in minimum tick size for the most heavily traded contract, (2) European Monetary Union and (3) the transition from open outcry to electronic trading. We analyse a number of microstructure features of the four largest European interest rate futures contracts throughout this period. In particular, we focus on bid–ask spread composition using a recent model which is appropriate for this market structure. Our analysis identifies the tick size as the largest bid–ask spread component in almost every instance, which suggests that participants in this STIR future market might benefit from a reduction in minimum tick sizes.

Item Type: Article
ISSNs: 1351-847X (print)
1466-4364 (electronic)
Keywords: bid–ask spreads, futures, market microstructure, price clustering, tick size
Subjects: H Social Sciences > HG Finance
Divisions: University Structure - Pre August 2011 > School of Management
Faculty of Business and Law > Southampton Management School > Finance
ePrint ID: 79324
Date Deposited: 19 Mar 2010
Last Modified: 27 Mar 2014 19:01
URI: http://eprints.soton.ac.uk/id/eprint/79324

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