Open outcry versus electronic trading: tests of market efficiency on crude palm oil futures

Author

Stuart Snaith (ssnaith@uvic.ca), Neil Kellard and Norzalina Ahmad

Essex Finance Centre Working Papers from University of Essex, Essex Business School

Abstract: Given the widespread transfer of trading to electronic platforms it is important to ask whether such trading is more efficient than traditional open outcry. To empirically assess this we examine the Crude Palm Oil market from 1995:06 to 2008:07 - a market where all trading swapped over from open outcry to electronic trading at the end of 2001. Results indicate that both forms of trading are long-run efficient but that short-run inefficiencies do exist. Our main findings, derived from the application of a novel threshold autoregressive relative efficiency measure, is that market efficiency is conditional on (i) the volatility of the underlying asset (ii) the maturity of the futures contract and (iii) the market trading system. Specifically, bootstrap results from the efficiency measure suggest that the open outcry trading method is superior for shorter maturities when volatility is high, and indistinguishable from electronic trading when volatility is low or maturity is long. These results suggest that electronic trading should not supersede open outcry, but rather that there are clear benefits to their coexistence.

Keywords: Market efficiency; commodity futures contracts; open outcry; electronic trading; crude palm oil (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst
Date: 2015-10
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