Derivatives Markets Research Centre

The Derivatives Markets Research Centre (DMRC) is hosted by the Capital Markets Research Centre and was refunded in 2018 for the Period 2018 to 2020 under Corporations regulation 7.5.88 through the use of excess funds from the Sydney Futures Exchange Fidelity Fund. The objective of the Centre is to produce world-standard research which can help shape Australian derivatives markets.

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Centre Researchers

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Dr Alex Frino
Dr Frino is Centre Director. He is Professor of Economics at the University of Wollongong. He holds a Master of Philosophy Degree in Finance from Cambridge University and PhD in Economics from University of Sydney.

 

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Dr Vito Mollica
Dr Mollica is Centre Deputy Director. He is Associate Professor of Finance at Macquarie University. He holds a Bachelor of Commerce Honours Degree and PhD Degrees from University of Sydney.

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Mr Michael Garcia
Mr Garcia is a Doctoral Candidate in Finance at the University of Wollongong. Michael Garcia holds an honors degree in Engineering from Colombia and a Master in Finance from Xiamen University, China.

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Mr Ognjen Kovacevic
Mr Kovacevic is a Doctoral Candidate in Finance at Macquarie University. He holds a Master of Science in Finance, and a Bachelor of Science in Economics, Management, and Finance from Bocconi University, Milan, Italy.

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Mr Riccardo De Blasis
Mr De Blasis is a Technical Assistant. He holds a Masters Degree in Economics and Statistics from the University of Chieti-Pescara in Italy.

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Research Output and Summary of Research

Published

Frino, A., Ibikunle, G., Mollica, V., & Steffen, T. (2018). The Impact of commodity benchmarks on derivatives markets: the case of the dated Brent assessment and Brent futures. Journal of Banking and Finance, Volume 95, October 2018, Pages 27-43. Download from: https://www.sciencedirect.com/science/article/pii/S0378426617302042

Summary
We examine the response of ICE Brent Crude futures to the spot Dated Brent benchmark published by Platts. Trading activity in the futures market intensifies during the benchmark assessment. We also find trading in the direction of the published benchmark during the price assessment window. Aligned positions and a substantially increased arrival rate of informed traders suggest that sophisticated traders, taking advantage of a rise in uninformed trading activity, induce the price run-up in Brent futures, ahead of the Dated Brent assessment end. The general increase in the arrival rate of both informed and uninformed traders during the assessment window underlines the benchmark's relevance and its potential for attracting liquidity. Our results are robust to alternative specifications and underscore the significance of physical commodity benchmarks as critical elements of the financial market infrastructure.


Frino and Garcia (2018), “Price discovery in short‐term interest rate markets: Futures versus swaps”, Journal of Futures Markets, vol. 38, no. 10, pp. 1179-88. Download from: https://onlinelibrary.wiley.com/doi/abs/10.1002/fut.21935

Summary
This study examines price discovery at the short end of the yield curve by examining the lead–lag relationship in the prices of Australian interest rate swap and bank accepted bill futures contracts. Consistent with previous research, we find strong bidirectional flows of information between swap and futures markets during daytime trading. However, the swap market leads price discovery during overnight trading while futures markets lead swap markets on macroeconomic announcement days—both new findings. We demonstrate and conclude that price discovery in derivatives at the short end of the yield curve is driven by transaction costs.


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Working Papers

Frino, Kovacevic, Mollica, “Depth and spreads in futures markets - relationship with executions, submissions, and cancellations”, Journal of Futures Markets, accepted for publication. Download from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3341280

Summary
This paper examines the relationship between limit order submissions and liquidity. We find that there is a negative relationship between the limit order arrival rate and depth at the best quotes (limit order queue length) and a positive relationship between submissions and bid-ask spreads. This is consistent with queuing theory predicting that an increase in the limit order arrival rate increases the queue length and therefore the time to execution of a limit order. Consequently, liquidity providers cover the increase in costs and risks associated with the increase in the time to execution of limit orders by increasing bid-ask spread.


Kovacevic and Mollica “The Sensitivity of Trading to the Cost of Information: Evidence from futures markets”. Download from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3341081


 Summary

This study examines the impact of changes in the price of the data feeds on the efficiency of price discovery. To this end, we use three exogenous events arising from the staggered increase of price quotation fee on Chicago Mercantile Exchange to test the theoretical predictions of Cespa and Foucault (2014) who note that price discovery is “…determined by the fee charged by exchanges for price information”. After controlling for known determinants of price discovery, we observe a decrease in efficiency of price discovery following the increases in the price of the data, in line with the theory.


Frino and Garcia “The Impact of HFT on the Speed of Adjustment to New Information: Evidence from Interest Rate Derivatives” Download from: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3326300

Summary

This study investigates the impact of HFT on the intraday speed of adjustment and price discovery following scheduled macroeconomic announcements for interest rate derivatives. Our results demonstrate that the speed of adjustment to new information has been improved for both interest rate derivatives, exchange-traded futures and over-the-counter (OTC) traded swaps, in the presence of HFT. In addition, we examine the lead-lag effects between swaps and futures during macro information releases in the pre- and post-colocation periods. We find that HFT strengthens the lead effects of futures on scheduled announcement days.


The Research of the Centre is funded by the ASX under Corporations regulation 7.5.88 through the use of excess funds from the Sydney Futures Exchange Fidelity Fund.