Daytime vs. Overnight Trading in Equity Index Futures Markets

Transcription

1 Dayime vs. Overnigh Trading in Equiy Index Fuures Markes Sandip Dua (Corresponding auhor) School of Business, Dep. of Economics and Finance Souhern Connecicu Sae Universiy 501 Crescen Sree, New Haven, CT, 06515, U.S.A. Tel: Fax: Subhash C. Sharma Dep. of Economics, Souhern Illinois Universiy Carbondale Carbondale, IL, 62901, U.S.A. Received: May 6, 2012 Acceped: May Online Published: June 6, 2012 doi: /afr.v1n2p13 URL: hp://dx.doi.org/ /afr.v1n2p13 Absrac In his sudy, we examine he informaion links beween dayime and overnigh rading sessions in he E-mini fuures markes. Our analysis includes he overnigh session which hihero remains unexplored in he E-mini lieraure. Overall, he resuls sugges ha, for he sample period considered, despie being 24-hour markes, he dayime and overnigh sessions appear o be segmened and ha he dayime session behaves like a separae dayime marke. Also, he overnigh session faciliaes an efficien flow of informaion from one dayime session o he nex, hereby miigaing he pricing errors in he process. JEL Classificaion: G11, G12, G13, G14 Keywords: Informaion Shares, Fuures Markes, E-mini 1. Inroducion The primary focus of his sudy is o examine he poenial informaion links beween dayime and overnigh rading sessions in he E-mini fuures markes (E-mini markes). The E-mini fuures conracs (Noe 1) rade exclusively on he fully auomaed GLOBEX rading plaform a he Chicago Mercanile Exchange (CME) virually 24-hours a day. We also examine if such a rading environmen makes he E-mini markes any differen from he ones ha operae only during regular rading hours (henceforh will be referred o as dayime markes ). One major conribuion of his sudy lies in he fac ha we include he overnigh rading session on GLOBEX in our analysis, which ill daeremains unexplored in he lieraure, paricularly afer he inroducion of E-minis in Sepember We examine he E-mini NASDAQ-100 and E-mini S & P 500 fuures markes, and conras he dayime and overnigh rading sessions. In paricular, we address he following four issues: (1) Are he dayime rading reurns more volaile han he overnigh reurns? (2) Are he dayime E-mini rades more informaive han he overnigh rades? (3) Are he dayime and overnigh rading sessions inegraed or segmened? If hese sessions are inegraed, hen in accordance wih he resuls documened in exan lieraure, he overnigh rades should miigae he pressure on rading volume a he beginning of, and a he end of he dayime rading sessions. (4) Do he overnigh rades help miigae he pricing errors a he beginning of he dayime rading sessions? The answers o hese quesions can provide insighs ino he influence of informaion arrival and processing of he same on marke efficiency and inegraion. Furher, a beer undersanding of he mechanics of boh dayime and overnigh rading will help he CME in improving he governance of auomaed rading on GLOBEX. The above issues have never been examined in a scenario where he marke under consideraion is open for virually 24-hours. Resuls on similar issues documened in he lieraure and peraining o dayime markes in general, moivae us o re-examine hese issues in a ruly 24-hour seing. We begin by pariioning he rading period ino dayime (8:30AM o 3:15PM, Chicago ime, Noe 2) and overnigh (3:30PM o 8:29:59AM, he nex day) sessions. Firs, we find ha dayime rading reurns are significanly more volaile as compared o heir overnigh counerpars. Wha is sriking here is ha despie he E-mini markes being Published by Sciedu Press 13 ISSN E-ISSN

2 24-hour markes, his resul is no in conras wih hose obained in earlier sudies on dayime markes. These sudies show ha dayime rading reurns are significanly more volaile as compared o he non-rading overnigh reurns. This apparen similariy wih dayime markes moivaes us o explore he reasons behind his phenomenon. Second, assuming ha rade price volailiy is direcly relaed o he informaion flow as suggesed by Ross (1989), i may be argued ha significanly more informaion is revealed during he dayime rading sessions. Resuls from he Hasbrouck (1995) informaion share model confirm ha he dayime rades are indeed more informaive as compared o heir overnigh counerpars, hereby providing some preliminary evidence in favor of marke segmenaion. Kurov e al. (2004) argue ha exchange locals (rading E-minis) use heir proximiy o large buy/sell order flow informaion arriving ino he pis and ake sraegically accurae posiions on GLOBEX. In oher words, hey ransfer a subsanial chunk of hose large floor orders o he GLOBEX plaform in order o ake advanage of is superior order execuion speed, while he informaion which iniiaed hose large floor orders is sill fresh and may be aced upon. Kurov (2008) show ha rades iniiaed by exchange-locals accoun for more han 60% of price discovery during he rading day. Tu and Wang (2007) noe ha E-minis improve he informaion flow in fuures markes. Chung (2010) find ha pricing errors are smaller in E-mini markes as compared o floor-raded markes and conclude ha elecronic rading has special aracions for informed raders. Massimb and Phelps (1994) repor ha rading on GLOBEX is quie expensive unless rades occur in large volumes, hereby lowering he average oal cos/uni of rade. Kurov e al. (2004), furher argue ha he E-mini raders collecively raise he rading volume on GLOBEX around he ime when large orders hi he floor, and hey cie his as he main reason for he exponenial growh in dayime rading volume on GLOBEX, despie he cos disadvanage as poined ou by Massimb and Phelps (1994). Hence, if he locals rade mosly around large floor orders in order o avoid he high cos of rading on GLOBEX, hen here should no be much of an incenive for hem o rade during he overnigh session when he floor is closed. The E-mini raders should herefore behave as if hey are operaing in a dayime marke, and his behavior should be refleced in he rading volume from boh he sessions. This, in urn would indicae if he wo sessions are inegraed or segmened. Moreover, considering he fac ha his pracice of rading around large floor orders and he reasons behind he same as discussed above- are public news, i should also deer foreign raders from rading aggressively during he overnigh session. These argumens and he apparen similariy of E-mini markes wih he dayime markes in general -as suggesed by our iniial resuls repored earlier- moivae us o conras he dayime and overnigh rading volumes in order o deermine if he dayime and overnigh sessions in he E-mini markes collecively behave like a 24-hour marke or like wo separae markes. We find ha for he sample period considered, he dayime rading volumes are significanly higher as compared o heir overnigh counerpars and ha he rading volumes from boh sessions depic separae U-shapes, as found in quie a few earlier sudies on dayime markes. Based on hese observaions we conclude ha he dayime and overnigh sessions are segmened in accordance wih he argumens in Werner and Kleidon (1996). Furher, hese resuls also confirm ha he dayime session behaves like a separae dayime marke, which in urn explains he higher variance of dayime rading reurns a ypical resul for dayime markes in general where overnigh sessions do no exis- and also he higher informaion share associaed wih he dayime session. This finding also explains he U-shaped volume paern for he dayime session, hereby indicaing ha he exisence of an overnigh session does no miigae he pressure on rading volume a he beginning of, and a he end of he dayime session. The U-shaped volume paern for he dayime session is also in sharp conras o he argumens in Brock and Kleidon (1992), which is no surprising given he fac ha he dayime session behaves like a separae dayime marke. This apparen paradox may also be explained if we view he above resuls in ligh of he key finding documened in Massimb and Phelps (1994) and Kurov e al. (2004), as discussed above; given he curren rading environmen a he CME, here is no much of an incenive for he E-mini raders o rade during he overnigh session, when he floor is closed. Finally, Grossman e al. (1980) show ha he compeiive equilibrium which binds he differen fragmens of he noion of efficiency ogeher, breaks down due o lack of rade. This resul and he subsanially lower rading volume associaed wih he overnigh sessions herefore moivae us o examine he efficiency aspec of he overnigh rading session by paricularly focusing on pricing errors (i.e., he variance of rading reurns a he beginning of he dayime session). The cenral argumen here is ha he overnigh session has he poenial o process and efficienly ransfer he informaion relayed from he dayime session, and give he E-mini raders a benchmark price o go by a he beginning of he dayime session, which begins he nex day. Hence, in accordance wih he argumens in Amihud and Mendelson (1991), Dhillon e al. (1997) and Tse (1999), he variance of 24-hr-8:30AM-o- 8:30AM reurns (i.e., he pricing errors for he dayime session which is no preceded by a long non-rading overnigh period) should no be significanly differen from ha for he 24-hr-3:15PM-o-3:15PM reurns. However, he resuls from Grossman e al. (1980) cas a doub if his will hold rue for he E-mini markes wih such low rading volume for he Published by Sciedu Press 14 ISSN E-ISSN

3 overnigh sessions. We find ha for he sample period considered, he overnigh session, despie is low rading volume, acs as a medium hrough which informaion is efficienly ransferred from one dayime session o he nex, hereby miigaing he pricing errors a he beginning of each dayime session. This resul is in sharp conras o he findings documened in previous sudies on dayime markes where researchers have found ha significanly higher pricing errors vis-à-vis close-o-close reurns are a characerisic feaure of such markes (e.g., Amihud and Mendelson 1987; Soll and Whaley 1990). In wha follows nex, we bridge he lieraure on dayime and overnigh rading and also discuss our research objecives, followed by a descripion of he daa and a discussion on he mehodology and resuls. Finally, we presen he conclusions of his sudy. 2. From Dayime Trading o Round-he-Clock Trading Coppejans and Domowiz (1999) examine he mechanics of he GLOBEX rading plaform before he inroducion of E-minis in GLOBEX was jus an afer-hours rading venue for he regular fuures conracs during he sample period (7/1/94 hru 9/1/94) ha hey consider. The inroducion of E-minis in Sepember 1997 has dramaically changed he scenario, and hese markes are now he mos liquid markes in CME s hisory. These changes herefore warran anoher look a he dayime and overnigh rading sessions. Oldfield and Rogalaski (1980), French and Roll (1986), Barclay e al. (1990) and Tse (1999), compare he variance of dayime and overnigh rading reurns and find ha dayime rading reurns are significanly more volaile as compared o heir non-rading overnigh counerpars. These are however sudies on dayime markes. These resuls moivae us o re-examine his issue in he conex of E-mini fuures markes, i.e., in a 24-hour seing. Ross (1989) argues ha if he volailiy of reurns is caused by he release of public informaion, hen volailiies during rading and non-rading hours are primarily relaed o he flow of informaion in general, raher han privae informaion and noise rading as suggesed by Oldfield and Rogalaski (1980), French and Roll (1986) and Barclay e al. (1990). Tse (1999) examines he Japanese Governmen Bond Fuures conracs raded a he Tokyo Sock Exchange (TSE) and a he London Inernaional Financial Fuures and Opions Exchange (LIFFE) and argues likewise. Therefore, in he E-mini fuures markes, if he dayime rading reurns are significanly more volaile as compared o heir overnigh counerpars, hen one possible explanaion could be ha significanly more informaion is revealed during he dayime rading sessions, and i would also provide some preliminary evidence in favor of marke segmenaion. Resuls from he previous sudies on dayime markes herefore moivae us o examine hese noions in he conex of E-mini fuures markes. The previous sudies on E-minis limi he analysis o regular rading hours only. Hasbrouck (2003), Kurov e al. (2004) and Aes e al. (2005) sudy he price discovery aspecs of E-minis. They find ha E-minis lead he price discovery process. Kurov e al. (2004) furher argue ha he exchange locals rading E-minis ake sraegically accurae posiions on GLOBEX around he ime when large (buy/sell) orders hi he floor. They also observe ha rades beween exchange locals and off-exchange cusomers accoun for he larges proporion of rading volume for he wo E-mini conracs considered here. One major finding of heir sudy is ha he proximiy of he exchange locals o he rading floor, coupled wih he superior order execuion speed on GLOBEX, resul in he price discovery dominance of E-minis. Massimb and Phelps (1994) argue ha exchange locals generally prefer he floor over GLOBEX due o he fac ha rading on GLOBEX is quie expensive. Transacion coss are higher on GLOBEX and commissions are charged on a per conrac basis. However, hey furher observe ha if for some reason he aggregae rading volume increases on GLOBEX, hen he overall ransacion cos declines vis-à-vis he same for floor rades, hereby making i economical o rade on GLOBEX. Kurov e al. (2004), conclude ha when he informaion regarding a large buy/sell order his he floor and he locals need o ac fas on ha informaion o make a profi, he GLOBEX plaform, wih is superior order execuion speed, provides hem wih an opporuniy o execue a subsanial number of orders wihin a shor ime window while he informaion which iniiaed hose large floor orders in he firs place is sill fresh. A ha ime, a subsanial chunk of floor orders ges ransferred o GLOBEX, which booss he rading volume and makes i economical for he locals o rade on GLOBEX. Kurov e al. (2004) cie his as he main reason for he exponenial growh in dayime rading volume on GLOBEX, despie he cos disadvanage as poined ou by Massimb and Phelps (1994). Kurov (2008) furher repor ha rades iniiaed by exchange-locals accoun for more han 60% of price discovery during he rading day. Finally, GLOBEX remains closed from 3:15PM hru 3:30PM and from 4:30PM hru 5:00PM. These being cenral imes, i does no leave a ime window wide enough o fi he E-mini rader s scheme of hings, paricularly o make use of informaion released afer hours. 3:15PM in Chicago means 4:15PM in New York, which is 15 minues pas he closing ime for he Published by Sciedu Press 15 ISSN E-ISSN

4 markes in he eas coas. The afer hours markes open a 4:00PM (ET) and close a 6:30PM (ET). In Chicago, he GLOBEX remains closed for 45 minues during ha ime window. I follows from he above discussion ha for he E-mini marke paricipans (mosly exchange locals who also mainain rading desks a he CME floor), here should no be much of an incenive for hem o coninue wih E-mini rading once he CME floor closes for he day. Moreover, he fac ha he pracice of rading around large floor orders -due o reasons discussed above- is public news, i should also discourage he foreign raders from rading aggressively during he overnigh session. An examinaion of he dayime and overnigh rading volume should herefore reveal if hese wo sessions collecively behave like a 24-hour marke or like wo separae markes. I is in his backdrop ha we proceed o conras he rading volumes from boh dayime and overnigh sessions, and examine if hese wo sessions are inegraed or segmened. I is quie well known ha inra-day volume paerns in sock markes are U-shaped (Wood e al., 1985; Harris, 1986; Werner & Kleidon,1996; Barclay e al., 2003), i.e., heavy rading a marke open and close, and relaively hin rading in he middle. Admai and Pfleiderer (1988) sugges ha such volume paerns arise as a resul of conrasing rading sraegies on he par of informed and uninformed raders (i.e., liquidiy raders). In a more recen sudy, Barclay e al. (2003) also provide empirical suppor for his line of reasoning. Brock and Kleidon (1992), however, argue ha heavy rading a marke open and close sem from he presence of a long overnigh period during which raders canno rade. In he case of E-mini markes, however, rading may coninue overnigh on GLOBEX. Hence, in accordance wih he argumens in Brock and Kleidon (1992), he overnigh screen-rades should miigae he pressure on rading volume a he beginning of, and a he end of he dayime rading sessions. We examine his noion by analyzing he volume paerns in boh he E-mini S&P 500 and E-mini NASDAQ-100 fuures markes. Finally, Werner and Kleidon (1996) argue ha if here are wo markes A (assume his marke o be he overnigh rading session) and B (assume his o be he dayime rading session), and if Marke A s close (open) coincides wih he opening (closing) of Marke B, hen he raders should be indifferen beween rading a Marke A s close (open) and a Marke B s open (close), if hese wo markes are inegraed. They furher argue ha if markes A and B are inegraed, hen heir individual volume paerns should merge o form a single U-shaped curve. We examine his noion by analyzing he rading volumes from he dayime and overnigh sessions. Amihud and Mendelson (1987) examine he effecs of wo conrasing rading mechanisms he periodic clearing house mechanism and he coninuous dealership mechanism (Noe 3)- on he behavior of reurns on acive New York Sock Exchange (NYSE) socks. Comparing he behavior of open-o-open and close-o-close reurns, hey conclude ha his difference in rading mechanism significanly affecs he behavior of sock reurns, and hence, he variance of open-o-open reurns is significanly higher as compared o he same for close-o close reurns. Soll and Whaley (1990), however, argue ha since he marke specialis deermines he opening price a he NYSE hereby ending he overnigh period wih no rading aciviy- and allows he marke makers o begin regular rading aciviy by posing heir quoes, (s)he needs o be compensaed for he service rendered o he marke paricipans. The higher volailiy of open-o-open reurns as compared o he same for is close-o-close counerpar i.e., he noise- may herefore be regarded as he specialis s compensaion. Amihud and Mendelson (1991) furher examine his issue using he daa from TSE (Noe 4). They find ha for he afernoon session, which is no preceded by a long non-rading period, he open-o-open reurns exhibi he same volailiy paern as compared o heir close-o-close counerpars. They conclude ha he prime reason for he higher volailiy of reurns a marke open -i.e., he pricing errors a marke open- is he exisence of a long non-rading period. In une wih he findings in Amihud and Mendelson (1991), Dhillon e al. (1997) examine idenical gold fuures conracs raded a he Commodiy Exchange of New York (COMEX) and a he Tokyo Commodiy Exchange (TOCOM). They examine open-o-open and close-o-close reurns for hese wo markes and find ha COMEX open-o- open reurn variance is 12% greaer han is close-o-close counerpar, and he same is jus 5% for TOCOM. Supporing he argumens of Amihud and Mendelson (1991), Dhillon e al. (1997) conclude ha i is due o he efficien flow of informaion from he open marke (COMEX) o he closed marke (TOCOM), ha he TOCOM open-o-open reurn variance is only 5% greaer as compared o is close-o-close counerpar. Similarly, he higher (12%) open-o-open reurn variance for COMEX may be explained by he fac ha he informaion revealed during he TOCOM rading period is no efficienly ransferred o he closed marke COMEX. Tse (1999) argues likewise. Finally, Grossman e al. (1980) argue ha he non-exisence of compeiive equilibrium in financial markes may be hough of as a breakdown of compeiive markes due o lack of rade. In view of he fac ha he overnigh rading volume migh be significanly low as compared o is dayime counerpar, we are moivaed o examine if he overnigh rading session is capable of processing and efficienly ransferring informaion from one dayime rading session o he nex and miigaing he pricing errors in he process. In oher words, he overnigh session has he Published by Sciedu Press 16 ISSN E-ISSN

5 poenial o process and efficienly ransfer he informaion relayed from he dayime session, and give he E-mini raders a benchmark price o go by a he beginning of he dayime session, which begins he nex day. Hence, i is quie logical o expec ha he variance of 24-hr-8:30AM-o- 8:30AM reurns should no be significanly differen from ha for he 24-hr-3:15PM-o-3:15PM (Noe 5) reurns. However, in view of he Grossman e al. (1980) resuls, we examine if his noion will hold rue for E-mini markes, despie he low rading volume associaed wih he overnigh sessions. 3. Daa For his sudy, we employ he ransacions daa for wo major equiy index fuures conracs raded on GLOBEX: (i) E-mini S&P 500 and (ii) E-mini NASDAQ-100 (Noe 6). These daa are obained from he Commodiy Fuures Trading Commission (CFTC). Our sample period exends from Sepember 1, 2004 o Augus, 31, 2005 (259 rading days). Our objecive was o obain daa for a period free from he influences of he recen credi crisis. The credi crisis, is associaed dynamics and influences on fuures marke are oo broad o address in one sudy. Furhermore, daa availabiliy issues limied us o his sample period only. We only consider he nearby fuures conracs for he analysis. The E-mini S&P 500 was launched on Sepember 9, 1997 and he E-mini NASDAQ-100 was inroduced on June 21, Boh hese conracs rade exclusively on GLOBEX 24-hours a day; excep from 3:15PM o 3:30PM, and from 4:30PM o 5:00PM. The raw daa se obained from CFTC conains six variables; for each rade ransacion we have he icker symbol (ES = S&P 500/NQ = NASDAQ-100), conrac mauriy dae, order execuion dae, order execuion ime, number of conracs raded and he conrac price. The raw daa se documens all rades ha occur a each poin in ime. For example, if 20 differen E-mini S&P 500 ransacions occur a 8:45:36 AM, he raw daa se documens each such ransacion. If more han one ransacion occur a any poin in ime, hen in accordance wih he earlier sudies on E-minis, only he las observaion is considered. Some basic summary saisics for he average inra-day rading volumes are presened in Table 1 below and a comprehensive illusraion is presened in Figure 1. Inser Table 1 here 4. Mehodology and Empirical Resuls 4.1 Dayime and Overnigh Trading Reurns To examine wheher dayime rading reurns are more volaile as compared o heir overnigh counerpars, he rade prices repored a 8:30AM and 3:15PM are used o compue he reurns for he dayime rading sessions, while he rade prices repored a 3:15PM and 8:30AM, he nex day, are used o compue he reurns for he overnigh sessions. An F-es is hen employed o examine wheher he variance of dayime rading reurns is significanly higher as compared o is overnigh counerpar. The summary saisics and resuls presened in Table 2 below, confirm ha for he sample period considered, he dayime rading reurns are significanly more volaile as compared o heir overnigh counerpars in boh he E-mini S&P 500 and E-mini NASDAQ-100 fuures markes. Despie he fac ha he E-mini fuures markes are open for virually 24-hours, hese resuls are consisen wih hose obained in quie a few earlier sudies on U.S. and Japanese sock markes (e.g., Oldfield and Rogalaski 1980; French and Roll 1986; Barclay e al. 1990; Tse 1999) which operae only during regular rading hours (i.e., dayime markes in general). Going by he assumpion ha volailiy of reurns is caused by he release of public informaion (Ross 1989), his finding herefore poses he quesion: Is he dayime rading session more informaive compared o is overnigh counerpar? If ha is indeed he case, hen i migh explain he higher volailiy of dayime rading reurns repored here. Inser Table 2 here 4.2 Are he Dayime Trades more Informaive? Firs we separae he dayime and overnigh rades. The overnigh session being longer in duraion as compared o is dayime counerpar, in order o obain rade price ime series of approximaely he same lengh, he dayime rade series is spaced a 5-minue inervals and he overnigh series a 12-minue inervals respecively. These wo price series (Noe 7) are hen used as inpus for he VECM based Hasbrouck (1995) informaion share model o obain he informaion shares. Since he same conrac is raded during he dayime and overnigh sessions, i is quie logical o expec ha he dayime and overnigh fuures prices should share a common random-walk componen and move ogeher in he long run. These wo price series should herefore form a coinegraed sysem, and furher, based on he Granger Published by Sciedu Press 17 ISSN E-ISSN

6 represenaion heorem (Engle and Granger 1987), he price changes may be represened by a vecor error correcion model (VECM) as follows: where 1 1, 1 2, 1 k 1 i i i 1 p z p, (1) z p p is he error correcion erm (Noe 8), Δ is he firs difference operaor, p is a (2 x 1) vecor of coinegraed prices, is a (2 X 2) marix of auoregressive coefficiens, k is he number of lags. i is a (2 X 2) marix, α is (2 X 1) adjusmen parameer vecor, β / is a (2 X 1) coinegraing vecor, which in accordance wih quie a few earlier sudies is resriced o (1, -1) /. is a (2 X 1) error vecor of serially uncorrelaed residuals wih covariance marix Ω. The Hasbrouck (1995) informaion share model is hen used o obain he informaion shares. The Hasbrouck (1995) approach uses he VECM (1) (Noe 9) as is basis. He demonsraes how equaion (1) may be represened in a vecor moving average form (VMA): p s ( L ), (2) s 1 where ( 1,1 ) is a column vecor, ( 1 2 ) is a row vecor and (L) is a marix polynomial in he lag operaor. His argumen is ha in coinegraed markes here is an implici efficien price which is common o all markes, and he sources of variaion in his efficien price are aribued o he differen markes. In his framework, Hasbrouck (1995) defines informaion share as he proporion of he efficien price innovaion variance ha can be aribued o he respecive markes. Accordingly, he shows ha he incremen in (2) is he common facor innovaion and he componen of he price change ha is permanenly impounded ino he securiy price, and is presumably due o new informaion. Finally, he decomposes he variance of he common facor innovaions as var( ), and defines he informaion share of a marke as he proporion of var( ) ha is aribuable o he innovaions in ha marke. If Ω is diagonal (i.e., if he marke innovaions are uncorrelaed across markes), he informaion share of marke j is given by: j 2 2 j j IS, (3) where j is he j-h elemen of ψ. If he price innovaions are correlaed across markes, hen i is impossible o obain he informaion shares using (3). In ha case he resuls depend upon he ordering of he variables in he Cholesky decomposiion of Ω, and Hasbrouck s model produces esimaes of upper and lower bounds of he informaion shares. For he purpose of his paper, we use he approach suggesed by Baillie e al. (2002), and calculae he informaion shares direcly from VECM(1) wihou obaining VMA (2) (Noe 10). The Hasbrouck (1995) informaion share model has been used in quie a significan number of sudies in he pas (Tse, 1999; Hasbrouck, 2003; Kurov e al., 2004; Aes e al., 2005, o noe a few). These sudies vouch for he relevance of he informaion share model in his sudy. The informaion share esimaes for he dayime and overnigh rading sessions are repored in Table 3 below. Inser Table 3 here The informaion share esimaes clearly indicae ha for he sample period considered, he dayime rades in he E-mini S&P 500 and E-mini NASDAQ-100 fuures markes are indeed more informaive as compared o heir overnigh counerpars, hereby suggesing ha significanly more informaion is revealed during he dayime sessions and ha he dayime and overnigh sessions are probably segmened. The mean esimaed informaion shares for he dayime and overnigh rades are 66.92% and 33.08% for E-mini S&P 500 and 99.38% and 0.61% for E-mini NASDAQ-100 Fuures respecively. These resuls are consisen wih he argumens and resuls documened in Ross (1989) and in Tse (1999). 4.3 Marke Segmenaion Our objecive here is wofold; (i) o see if he dayime and overnigh sessions are inegraed or segmened (ii) o see if he overnigh session helps in miigaing he pressure on rading volume a he beginning of, and a he end of he dayime rading session. We pariion each 24-hour period ino 1-hour inervals. The firs inerval sars a 12:00AM. To mainain coninuiy, we also include he 30- minue inerval from 8:00AM o 8:29:59AM as par of he overnigh Published by Sciedu Press 18 ISSN E-ISSN

7 rading session. The rading volumes corresponding o each inerval are hen added over he enire sample period and subsequenly divided by he number of sample rading days o compue he average inra-day rading volumes for he sample period. The average volume paerns for he E-mini S&P 500 and E-mini NASDAQ-100 Fuures -for he enire sample period- are illusraed in Figures 1 (a) and 1 (b). Inser Figure 1(a) here Inser Figure 1(b) here Consisen wih quie a few earlier sudies where rading aciviies do no occur round-he-clock (Wood e al., 1985; Harris, 1986; Werner & Kleidon, 1996; Barclay e al., 2003), boh figures depic U-shaped volume paerns for he dayime rading sessions. These resuls are consisen wih he microsrucure model discussed in Admai and Pfleiderer (1988). The argumens in Brock and Kleidon (1992) however fail o explain he U-shaped volume paerns for he dayime rading sessions. Since GLOBEX operaes virually 24-hours a day, he raders have he opion o rade before 8:30AM in he morning (i.e., before he dayime rading session begins), and anyime afer 3:15PM in he evening (i.e., afer he dayime session ends). Hence, according o Brock and Kleidon (1992), we should no observe such clear U-shaped volume paerns for he dayime rading sessions. The rading volumes for he overnigh sessions are exremely low as compared o he same for he dayime sessions. Furher, we also observe separae U-shapes for he dayime and overnigh sessions, which indicae ha hese sessions are segmened in accordance wih he argumens in Werner and Kleidon (1996). Wha makes our resuls in FIGURE I even more sriking is ha we observe clear evidence of marke segmenaion despie he fac ha we are examining a scenario where he same asse an E-mini fuures conrac- is raded in boh in he dayime and overnigh sessions. Our resuls provide empirical suppor for he argumens documened in Massimb and Phelps (1994) and Kurov e al. (2004), and are in conformiy wih he noion ha we phrased earlier; given he curren rading environmen a he CME, here is really no much of an incenive for he E-mini raders o rade overnigh, when he floor is closed. This is probably he prime reason why he dayime and overnigh sessions are segmened and ha he overnigh session does no miigae he pressure on rading volume a he beginning of, and owards he end of he dayime session, which is ypical for dayime markes in general. The E-mini markes are herefore no exacly 24-hour markes o he rue sense of he word. I is herefore no surprising o observe ha he dayime rading reurns are significanly more volaile, and ha he dayime rades are more informaive as compared o heir overnigh counerpars. Also, he fac ha he dayime session seems o operae as a separae dayime marke, explains he sharp conras wih he argumens in Brock and Kleidon (1992). 4.4 Overnigh Trades and Pricing Errors In order o examine wheher overnigh rades help miigae he pricing errors a he beginning of he dayime rading sessions, we use he 8:30AM and 3:15PM prices o compue he 24-hr-8:30AM-o-8:30AM and 24-hr-3:15PM-o-3:15PM reurns. Table 4 repors he summary saisics and comparisons of 24-hr-8:30AM-o-8:30AM and 24-hr-3:15PM-o-3:15PM reurn variances in he E-mini S&P 500 and E-mini NASDAQ-100 fuures markes. Inser Table 4 here The F-saisics (1.06 for E-mini NASDAQ-100 and 1.16 for E-mini S&P 500) are found o be saisically insignifican. These resuls are consisen wih he argumen documened earlier; in he E-mini fuures markes, he overnigh session acs as a medium by means of which informaion is efficienly ransferred from one dayime session o he nex. Hence, he 24-hr-8:30AM-o- 8:30AM reurn variances are no significanly differen as compared o heir 24-hr-3:15PM-o-3:15PM counerpars. Our resuls provide furher empirical suppor for he resuls and argumens in Amihud and Mendelson (1991), Dhillon e al. (1997) and Tse (1999). We conclude ha despie he low rading volume, he overnigh rading session aids in an efficien flow of informaion from one dayime rading session o he nex, hereby miigaing he pricing errors in he process. Our resuls are in sharp conras o hose repored in sudies peraining o dayime markes, where dayime rading sessions are preceded by a long non-rading overnigh period (e.g., Amihud and Mendelson 1987; Soll and Whaley 1990). 5. Conclusions In his sudy, we examine he poenial informaion links beween dayime and overnigh rading sessions in he E-mini fuures markes. We also examine if such a rading environmen makes he E-mini markes any differen as compared o hose which operae only during regular rading hours (i.e., dayime markes in general). Published by Sciedu Press 19 ISSN E-ISSN

8 We find ha for he sample period considered, dayime rades are more informaive vis-à-vis he overnigh rades, which is also he reason why, in accordance wih he argumens documened in exising lieraure, he dayime rading reurns are significanly more volaile as compared o heir overnigh counerpars. Higher volailiy of dayime rading reurns is a ypical resul for dayime markes in general. The rading volume paerns reveal ha he dayime and overnigh sessions are segmened and ha he dayime E-mini raders behave as if hey are operaing in a dayime marke. These resuls may be explained in ligh of he key finding documened in microsrucure lieraure on E-minis; given he curren rading environmen a he CME, here is no much of an incenive for he E-mini raders o rade during he overnigh session when he floor is closed. The E-mini markes are herefore no 24-hour markes o he rue sense of he word, and in paricular, he dayime session behaves like a separae dayime marke. This finding explains he higher variance of reurns and he higher informaion share associaed wih he dayime rades. We also find ha despie he low rading volume, he overnigh session aids in an efficien flow of informaion from one dayime rading session o he nex, hereby miigaing he pricing errors a he beginning of he dayime session. This resul is in sharp conras o hose found in earlier sudies on dayime markes. The low rading volume for he overnigh session should be a cause of concern for he CME auhoriies. Despie he fac ha he E-mini fuures markes are open for virually 24-hours, resuls from his sudy highligh an acue lack of ineres on he par of he E-mini raders o rade during he overnigh session. Given he argumens in Grossman e al. (1980), here is always a risk ha he low rading volume migh become sufficienly low, so as o hinder an efficien flow of informaion from one dayime rading session o he nex. We do see an opporuniy here for he marke regulaors o ry and boos he overnigh rading volume, under he curren infrasrucural seup. Since he dynamics of he overnigh session are considerably differen as compared o is dayime counerpar, he CME migh work owards geing he off-exchange cusomers o rade during he overnigh session. Assuming ha he off-exchange cusomers on an average rade a small number of conracs in any case, he volume/cos issue poined ou by Massimb and Phelps (1994) should no discourage hem o rade during he overnigh session. Finally, Kurov e al. (2004) observe ha, Alhough mos fuures indusry paricipans share he view ha a permanen move from open oucry o elecronic rading in mos fuures markes is all bu ineviable,. If his becomes rue some day, hen he resuls of his sudy provide sufficien moivaion o conduc his sudy again and examine he resuls. We believe he resuls will be quie ineresing, if no radically differen. References Admai, A. R., & Pfleiderer, P. (1988). A heory of inraday paerns: Volume, price and Volailiy. Review of Financial Sudies, 1, hp://dx.doi.org/ /rfs/1.1.3 Amihud, Y., & Mendelson, H. (1987). Trading mechanisms and sock reurns: An empirical invesigaion. Journal of Finance, 42, Amihud, Y., & Mendelson, H. (1991). Volailiy, efficiency and rading: Evidence from he Japanese sock marke. Journal of Finance, 46, Aes, A., & Wang, G. H. K. (2005). Informaion ransmission in elecronic versus open-oucry rading sysems: An analysis of U.S. equiy index fuures markes. Journal of Fuures Markes. 25, hp://dx.doi/org/ /fu Baillie, R. T., Booh, G. G., Tse, Y., & Zaboina, T.V. (2002). Price discovery and common facor models. Journal of Financial Markes, 5, hp://dx.doi.org/ /s (02) Barclay, M.J., Lizenberger, R., & Warner, J. B. (1990). Privae informaion, rading volume and sock reurn variances. Review of Financial Sudies, 3, hp://dx.doi.org/ /rfs/ Barclay, M. J., & Hendersho, T. (2003). Price discovery and rading afer hours. Review of Financial Sudies, 16, hp://dx.doi.org/ /rfs/hhg030 Brock, W.A., & Kleidon, A. W. (1992). Periodic marke closure and rading volume: A model of inraday bids and asks. Journal of Economic Dynamics and Conrol, 16, hp://dx.doi.org/ / (92)90045-g Chung, H., Sheu, H., & Hsu, S. (2010). Trading plaform, marke volailiy and pricing efficiency in he floor-raded and E-mini index fuures markes. Inernaional Review of Economics and Finance. 19(4), hp://dx.doi/org/ /j.iref Coppejans, M., & Domowiz, I. (1999). Pricing behavior in an off-hours compuerized Marke. Journal of Empirical Finance, 6, hp://dx.doi.org/ /s (99) Published by Sciedu Press 20 ISSN E-ISSN

9 Dhillon, U. S., Lasser, D. J., & Waanabe, T. (1997). Volailiy informaion and double versus Walrasian aucion pricing in U.S. and Japanese fuures markes. Journal of Banking and Finance, 21, hp://dx.doi.org/ /s (97) Engle, R. F., & Granger, C. W. J. (1987). Coinegraion and error correcion: Represenaion, esimaion and esing. Economerica, 55, hp://dx.doi.org/ / French, K.R., & Roll, R. (1986). Sock reurn variances: The arrival of informaion and he reacion of raders. Journal of Financial Economics, 17, hp://dx.doi.org/ / x(86) Grossman, S. J., & Sigliz. J. E. (1980). On he impossibiliy of informaionally efficien markes. American Economic Review, 70, Harris, L. (1986). A ransacion daa sudy of weekly and inradaily paerns in sock Reurns. Journal of Financial Economics, 16, hp://dx.doi.org/ / x(86) Hasbrouck, J. (1995). One securiy many markes: Deermining he conribuions o price Discovery. Journal of Finance, 50, Hasbrouck, J. (2003). Inraday price formaion in U.S. equiy index markes. Journal of Finance, 58, hp://dx.doi.org/ /j x Johansen, S. (1988). Saisical analysis of coinegraion vecors. Journal of Economic Dynamics and Conrol, 12, hp://dx.doi.org/ / (88) Johansen, S. (1991). Esimaion and hypohesis esing of coinegraion vecors in Gaussian vecor auoregressive models. Economerica, 59, hp://dx.doi.org/ / Kurov, A., & Lasser, D.J. (2004). Price dynamics in he regular and E-mini fuures Markes. Journal of Financial and Quaniaive Analysis, 39, hp://dx.doi.org/ /s Kurov, A. (2008). Informaion and noise in financial markes: Evidence from he E-mini Index Fuures. Journal of Financial Research, 31(3), hp://dx.doi.org/ /j x Massimb, M. N., & Phelps, B. D. (1994). Elecronic rading, marke srucure and liquidiy. Financial Analyss Journal, 49, hp://dx.doi.org/ /faj.v50.n1.39 Oldfield, G. S., & Rogalaski, R. J. (1980). A heory of common sock reurns over rading and non-rading periods. Journal of Finance, 35, Ross, S. (1989). Informaion and volailiy: The no-arbirage maringale approach o iming and resoluion irrelevancy. Journal of Finance, 44, Soll, H.R., & Whaley, R. E. (1990). Sock marke srucure and volailiy. Review of Financial Sudies, 3, hp://dx.doi.org/ /rfs/ Tse, Y. (1999). Round-he-clock marke efficiency and home bias: Evidence from he inernaional Japanese governmen bonds fuures markes. Journal of Banking and Finance, 23, hp://dx.doi.org/ /s (99) Tu, A. H., & Wang, M. (2007). The innovaions of e-mini conracs and fuures price volailiy componens: The empirical invesigaion of S&P500 Sock Index Fuures. Journal of Inernaional Financial Markes, Insiuions and Money. 17(2), hp://dx.doi/org/ /j.infin Werner, I. M., & Kleidon, A. W. (1996). U.K. and U.S. rading of Briish cross-lised socks: an inraday analysis of marke inegraion. Review of Financial Sudies, 9, hp://dx.doi.org/ /rfs/ Wood, R. A., McInish, T. H., Ord, J. K., & Keih, J. (1985). An invesigaion of ransacion daa for NYSE socks. Journal of Finance, 40, Published by Sciedu Press 21 ISSN E-ISSN

10 Noes Noe 1. E-mini fuures conracs are one-fifh he size of heir regular counerpars. In oher words, he conrac muliplier for hese conracs are one-fifh of hose for he regular versions. For example, o deermine he conrac value of an S&P 500 Fuures conrac, we need o muliply he S&P500 index value by 250 (he conrac muliplier). On he oher hand, o deermine he conrac value of he corresponding E-mini version, we need o muliply he S&P 500 index value by 50. Similarly, he conrac muliplier for NASDAQ-100 Fuures is 100 and he same for he corresponding E-mini version is 20. Noe 2. Kurov e al. (2004) use he daa from regular rading hours only, and hey consider he ime inerval from 8:30AM o 3:15PM as regular rading hours. This ime inerval coincides wih open-oucry rading a he CME. Hence, as in Kurov e al. (2004), we also consider his ime inerval as regular rading hours. Noe 3. A he NYSE, he opening price is deermined by he marke specialis by means of a marke clearing procedure. Under his procedure, he raders eiher submi a limi order or a marke order. These buy/sell orders accumulae and ulimaely, he marke clears a an opening price deermined by he specialis. Once he opening price is deermined by he clearing house mechanism, he coninuous dealership marke begins, and rading is carried ou coninuously by he marke makers who quoe he bid-ask prices. Amihud and Mendelson (1987). Noe 4. A he TSE, here are wo clearing ransacions: he firs one iniiaes he morning rading session and he second one iniiaes he afernoon rading session. Noe 5. The E-mini fuures markes never close, hence we use hese erminologies insead of open-o-open and close-o-close reurn variances as has been used so far in he lieraure on regular markes. Noe 6. Several oher E-mini fuures conracs exis a he CME. Mos of hem have been inroduced quie recenly and do no have sufficien rading volume for a meaningful sudy. Apar from hese wo conracs considered here, we did however aemp o include E-mini Russell 2000 Fuures (inroduced on 8/24/01) and E-mini S&P Midcap 400 Fuures (inroduced on 1/28/02) for his sudy. These wo conracs were however dropped from furher consideraion because of he lack of rading volume and infrequen rading paricularly in he overnigh rading sessions. Noe 7. The uni roo ess (ADF, Phillips-Peron and KPSS) and Johansen coinegraion ess (Johansen 1988; Johansen 1991) are no repored here due o space consrains. Noe 8. In accordance wih he discussion in Hasbrouck (1995), his error correcion represenaion incorporaes he fac ha raders a 3:15PM reac o he 8:30AM posed prices. Noe 9. The lag lenghs for he VECM were chosen on he basis of AIC/SBC crieria. Noe 10. Kurov e a. (2004) follow he same approach. Table 1. Summary Saisics of Average Inraday Trading Volumes Sample period is from Sepember 1, 2004 hrough Augus 31, Average inra-day rading volumes are compued over a period of 259 rading days. The dayime rading session begins a 8:30AM and ends a 3:15PM. The overnigh session begins a 3:15PM and ends a 8:29:59AM, he nex day. The GLOBEX plaform remains closed from 3:15PM hru 3:30PM, and from 4:30PM hru 5:00PM. Only he nearby conracs are used. If several rades occur a a paricular poin in ime, only he las observaion is used. Published by Sciedu Press 22 ISSN E-ISSN

11 Accouning and Finance Research Vol. 1, No. 2; 2012 Table 2. Summary Saisics of Dayime and Overnigh Reurns and F-ess ** indicaes significance a he 5% level. The variance is esimaed for he enire sample. The esimaion period is 259 rading days; Sepember 1, 2004 hrough Augus 31, The F-Saisic ess for equaliy of variance for he dayime and overnigh reurns respecively. The 8:30 AM and 3:15PM prices are used o compue he dayime rading reurns. The 3:15PM and 8:30AM prices, for he nex day, are used o compue he overnigh reurns. Table 3. Informaion Share Saisics for Dayime and Overnigh Trades Saisics are based on a VECM of wo price series; E-mini fuures prices from he dayime rading session and he same from he overnigh rading session. If several rades occur a a paricular poin in ime, only he las observaion is used. Sample period is 259 rading days; Sepember 1, 2004 hrough Augus 31, The dayime rading session being shorer in duraion as compared o is overnigh counerpar, he corresponding price series are spaced a 5-minue and 12-minue inervals respecively. The coinegraion ess are no repored. According o he Hasbrouck (1995) informaion share model, he informaion share of a price series is defined as he proporion of he efficien price innovaion variance ha may be aribued o ha price series. The figures under he columns Dayime and Overnigh are he informaion shares. Midpoin refers o he mean informaion shares respecively. Table 4. Summary Saisics of 24-hr-8:30AM-o-8:30AM Reurns and 24-hr 3:15PM-o-3:15PM The variance is esimaed for he enire sample. The esimaion period is 259 rading days; Sepember 1, 2004 hrough Augus 31, The F-Saisic ess for equaliy of variance for he 24-hr-8:30AM o-8:30am Reurns and 24-hr-3:15PM o-3:15pm Reurns respecively. Published by Sciedu Press 23 ISSN E-ISSN

12 Average Daily Trading Volume :00:00-00:59:59 04:00:00-04:59:59 02:00:00-02:59:59 E-mini NASDAQ-100 Fuures 06:00:00-06:59:59 9:30:00-10:29:59 08:00:00-08:29:59 11:30:00-12:29:59 15:30:00-16:30:00 13:30:00-14:29:59 Time 18:00:00-18:59:59 20:00:00-20:59:59 22:00:00-22:59:59 Figure 1(a) Average Daily Trading Volume :00:00-00:59:59 02:00:00-02:59:59 04:00:00-04:59:59 E-mini S&P500 Fuures 06:00:00-06:59:59 9:30:00-10:29:59 08:00:00-08:29:59 11:30:00-12:29:59 13:30:00-14:29:59 15:30:00-16:30:00 Time 18:00:00-18:59:59 20:00:00-20:59:59 22:00:00-22:59:59 Figure 1(b) Figure 1. The average hourly volumes are obained over a sample period of 259 rading days; Sepember 1, 2004 hrough Augus 31, Alernae inervals are labeled. Published by Sciedu Press 24 ISSN E-ISSN