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Changing the Size of a Futures Contract: Liquidity and Microstructure Effects
Author(s) -
Karagozoglu Ahmet K.,
Martell Terrence F.
Publication year - 1999
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1999.tb00470.x
Subject(s) - futures contract , tick size , market liquidity , index (typography) , economics , financial economics , business , monetary economics , world wide web , computer science
We analyze the relation between contract size and liquidity using data from the respecification of Sydney Future Exchange's (SFE) Share Price Index (SPI) and 90‐day Bank Accepted Bill (BAB) futures contracts. Respecification of SPI and BAB contracts presents a unique opportunity to investigate the effects of a change in futures contract size. SFE decreased the size of SPI futures by a factor of four while increasing its minimum tick. The BAB contract was doubled in size with the minimum tick size left unchanged. We find, after controlling for market factors, that the respecification of the SPI futures resulted in higher trading volume, while that of BAB futures decreased trading volume. The results regarding spreads are ambiguous. Based on two cases investigated, we conclude that decreasing the futures contract size was effective in terms of enhancing liquidity while increasing the size resulted in a reduction in liquidity.