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.

Centre Researchers

Research Output and Summary of Research - 2019

Working Papers

Frino, Alex, Off-Market Block Trades: New Evidence on Transparency and Information Efficiency (December 10, 2019). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3540621

Summary

This paper examines the price impact of off-market block trades in futures markets. Consistent with previous literature based on stock markets [Gemmill, 1996, Journal of Finance], a statistically significant price reaction is documented around the time that the trades are executed. This paper extends previous work by documenting a further statistically significant price reaction at the time that block trades are later reported. Contrary to previous research, these findings imply that delaying the reporting of off-market trades has an impact on markets by delaying the speed of adjustment to the information conveyed by block trades and therefore market price efficiency.

Frino, Alex and Kovacevic, Ognjen and Mollica, Vito and Webb, Robert I., The Sensitivity of Trading to the Cost of Information (November 10, 2019). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3540624

Summary

This study examines the impact of changes in data feed pricing schedules on the price discovery between competing venues, as espoused by Cespa & Foucault (2014). We utilize three exogenous events stemming from a staggered increase in the data feed price that transpired on the Chicago Mercantile Exchange and observe a decrease in the efficiency of price discovery following increases in the acquisition costs of exchange’s data feeds, in line with the theory. Our results indicate that the regulators need to closely monitor any increases in data fees since these not only redistribute income from the traders to the exchanges but also affect the quality of the market via price discovery, one of the market’s most important functions.

Gerace, Dionigi, Dynamics of Interest Rate Futures: A Comprehensive Study from The Sydney Futures Exchange (December 2, 2019). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3540633

Summary

This paper examines the dynamics of quoted bid-ask spreads, price volatility and percentage trading volume for the most liquid interest rate futures trading on the Sydney Futures Exchange. Using data for both the overnight and intraday markets of the Sydney Futures Exchange, patterns contrast the existing theory and prior research. During the Intra-night trading session, volume and volatility patterns show low trading activities between 5:30 and 9:30; while spreads show high asymmetric information during this interval. During the Intra-day trading session, both volume and volatility exhibits a significant increase at the opening and around 2.30pm, followed a significant decrease towards the end of the day session; Spreads are low at the opening and tendentially increase throughout the day up until the close of the day. We find that percentage Volume traded is higher during the day session; although spread significantly increases towards the end of the day session, it is tighter than the overnight spread. A number of tests are carried out documenting that these patterns are consistent with the effects of contagion from overseas markets, US versus Australia daylight savings, and major macro-economics information releases.

Zhou, Ivy Zeyang and Garcia, Michael and Frino, Alex, Impact of Algorithmic Trading on Speed of Adjustment to New Information: Evidence from Interest Rate Derivatives (December 11, 2019). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3540637

Summary

This study examines the impact of algorithmic trading (AT) on the speed of adjustment and price discovery during scheduled macroeconomic announcements for interest rate derivatives. In February 2012, the Australian Securities Exchange (ASX) introduced co-location services for futures traders. This change in market structure increases AT and, in this study, we examine price efficiency for both exchange-traded futures and over-the-counter (OTC)-traded swaps in the pre- and post-AT periods. Our results demonstrate that, in the presence of AT, the speed of adjustment to new information has improved for both futures and swaps. In addition, we find that the price discovery contribution of the futures market improves in the post-AT period, with this improvement significant for announcement days. We conclude that AT stimulates market adjustment to new information and enhances the price discovery of futures on days with scheduled macroeconomic releases.

Research Output and Summary of Research - 2018

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.

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.

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.