Changing the Size of a Futures Contract: Liquidity and Microstructure Effects

Posted: 16 Nov 1999

See all articles by Ahmet K Karagozoglu

Ahmet K Karagozoglu

Hofstra University, Zarb School of Business; New York University (NYU) - Volatility and Risk Institute

Terrence F. Martell

City University of New York (CUNY) - Baruch College - Zicklin School of Business

Abstract

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.

JEL Classification: G13

Suggested Citation

Karagozoglu, Ahmet K and Martell, Terrence F., Changing the Size of a Futures Contract: Liquidity and Microstructure Effects. Available at SSRN: https://ssrn.com/abstract=187508

Ahmet K Karagozoglu

Hofstra University, Zarb School of Business ( email )

Department of Finance
148 Hofstra University
Hempstead, NY 11549-1480
United States
(516) 463-5701 (Phone)
(718) 701-8331 (Fax)

HOME PAGE: http://sites.hofstra.edu/ahmet-karagozoglu

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Terrence F. Martell (Contact Author)

City University of New York (CUNY) - Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States
646-312-2070 (Phone)
212-312-2071 (Fax)

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