“Efficiency of Single-Stock Futures: An Intraday Analysis” by Yiuman TSE
Authors:
Yiuman TSE
Joseph K.W. FUNG
Using intraday bid ask quotes of Single-Stock Futures (SSF) contracts and the underlying stocks, we examine the pricing and informational efficiency of SSF traded on the Hong Kong Exchange. Both the SSFs and the stocks are traded on electronic platforms. The market microstructure and the data obviate the problems of stale and non-executable prices as well as uncertain bid-ask bounce of the thinly traded futures contracts. Nominal price comparisons show that over 80% of SSF quotes are inferior to stock quotes. Over 99% of the observed futures spreads are above one stock tick compared to only 2% of those for stocks. After adjusting for the cost-of-carry, however, SSF are fairly priced. Given higher stock trading costs, non-members should even find the futures attractively priced. Thus the absence of competitive market maker does not bias prices so as to discourage trading. SSF quotes also account for one-third of price discovery despite their low volume.
