Seminars 2009 — Abstracts

Friday, May 1

Speaker: Paul Kofman, Melbourne

Title: Price discovery on the floor – a tale of liquidity and volatility

Abstract: A number of studies compare the efficiency and transparency of floor trading with automated/electronic trading systems in the competition for order flow. While most of these studies find that electronic systems lead price discovery, a few studies highlight the weaknesses of electronic trading in highly volatile market conditions. A series of unusual events in 2006, sparking extreme volatility in natural gas futures trading, provide an ideal setting to revisit the resilience of trading system price leadership in the face of high volatility. We estimate time-varying Hasbrouck-style information shares to investigate the intertemporal and cross-sectional dynamics in price discovery. The results strongly suggest that the information share is time-dependent and contract-dependent. Floor trading dominates price discovery in the less liquid longer-maturity contracts, while electronic trading dominates price discovery in the most liquid spot-month contract. We find that the floor trading information share increases significantly with realized volatility.