Closing the floor: evidence of price discovery on the Sydney futures exchange

Abstract

This paper examines the contribution of local floor traders to price discovery on the Sydney Futures Exchange using the methods of error-correction and common-long-memory components. Four financial futures (Three-year bonds, Ten-year bonds, Ninety-day bank accepted bills, and the stock index) are examined. For each of the futures contracts, the price series of locals and other traders are cointegrated. The locals contribute about 40% of the order flow but account for as much as 73% of the price discovery. Error-correction analysis reveals exceptionally long lag structures in the dynamic adjustment of equilibrium prices in these markets. Both locals and other traders error-correct their prices to each other's trades. Locals acting as scalpers may fill a role similar to that of SOES bandits in equity markets. The research has policy implications for floor-closing initiatives and proposals on the London, Sydney, and Chicago futures exchanges and the Toronto Stock Exchange.