Price efficiency in futures and spot trading: The role of information technology

Authors:
Martin Wagener;Dennis Kundisch;Ryan Riordan;Fethi Rabhi;Philipp Herrmann;Christof Weinhardt
Affiliations:
School of Economics and Business Engineering, Karlsruhe Institute of Technology, Karlsruhe 76131, Germany;School of Business Administration and Economics, University of Paderborn, Paderborn 33100, Germany;School of Economics and Business Engineering, Karlsruhe Institute of Technology, Karlsruhe 76131, Germany;School of Computer Science and Engineering, University of New South Wales, Sydney 2052, Australia;School of Business Administration and Economics, University of Paderborn, Paderborn 33100, Germany;School of Economics and Business Engineering, Karlsruhe Institute of Technology, Karlsruhe 76131, Germany
Venue:
Electronic Commerce Research and Applications
Year:
2010

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Abstract

During the last years information technology has had a profound impact on financial markets. The speed of trading and the amount of available information has increased substantially. Nearly all exchanges have upgraded their trading systems to meet the demand of investors and enhance their competitive position. However, the impact on liquidity and price efficiency remains unclear. In this paper we present an event study to examine the effects of an infrastructure change at the Deutsche Borse in Germany. On April 23, 2007, Deutsche Borse released an upgraded version of their electronic trading system Xetra. We study the impact that this upgrade had on the efficiency of prices, measured as the pricing gaps between the observed futures prices and their theoretical values based on the underlying cash market. Our results suggest that the system upgrade reduced the pricing gapand thus improved price efficiency.