After-hours Trading in Equity Futures Markets

Transcription

1 Afer-hours Trading in Equiy Fuures Markes Mardi Dungey *+, Luba Fakhrudinova *, Charles Goodhar % * CFAP, Universiy of Cambridge + CAMA, Ausralian Naional Universiy % Financial Markes Group, London School of Economics February 5, 2008 Absrac While i is well known ha elecronic fuures daa absorb news (slighly) in advance of spo markes he role of he elecronic fuures movemen in ou of hours rading has no previously been explored. The behaviour of he 24 hour rade in he S&P 500 and Nasdaq 100 fuures marke reveals he imporan role of hese markes in absorbing news releases occurring ouside of normal rading hours. Peaks in volume and volailiy in his marke occur in conjuncion wih US 8:30am EST news releases, prior o he opening of he open-oucry markes, and in a less pronounced fashion immediaely pos-close he open-oucry marke. Price impac in hese markes is saisically higher in he pos-close han pre-open periods. JEL: F37, F42 Keywords: Price discovery, Fuures rading, VAR *We hank Jorge Andras-da-Silva and Tugrul Vehbi for excellen research assisance and Michael Barclay, Terence Hendersho, Alexander Ten Holer, Alex Kurov and Simon Taylor for useful discussions. Goodhar acknowledges he ESRC Research Programme on World Economy and Finance, Phase 1, via heir gran o he FMG o sudy The Sabiliy of he Global Financial Sysem, Regulaion and Policy Response.

2 1. Inroducion Spo and fuures equiy markes generally have formal opening and closing imes for floor based rade, bu increasingly hese markes can be accessed via elecronic rading sysems anywhere in he world, 24 hours a day, hough no (so far a leas) over he weekend break. One reason why his is imporan is ha many researchers in his field have aken he emporal passage of he spo, or fuures (for he same se of hours as he spo marke) markes around he world as providing an indicaion of, or proxy for, causal relaionships beween markes. Thus, for example, he change in price beween he open and close of he NYSE is used as an explanaory variable in equaions o model he change in price beween he previous close o he new open of he Tokyo Sock Exchange, or he London Sock Exchange (Engle e al., 1990). While his process is no biased, i may disribue he effecs of news incorrecly in 24 hour markes. For example, many economic news announcemens in he US occur a 8:30am EST, before he opening of he NYSE, see also Andersen, Bollerslev, Diebold and Vega (2006) who for his reason use fuures raher han spo marke daa. Company daa are also ofen announced afer he marke has officially shu; in previous imes his was a leas parly o proec he companies from over reacions o daa, allowing analyss ime o absorb he informaion before responding wih marke acions on he nex day. More recenly he adven of exended hours rading on Elecronic Communicaion Neworks (ECNs) has increased he hours for spo rading in equiy markes. In he presence of 24 hour rading elecronic markes, he effecs of news in equiy markes should be incorporaed immediaely, jus as in he foreign exchange markes; for an analysis of diurnal paerns in foreign exchange markes see Huang and Masulis (1999). This paper shows he effecs of afer-hours rade on he absorpion of news releases using GLOBEX daa on S&P500 and NASDAQ 100 fuures conracs raded on he Chicago Mercanile Exchange. The elecronic fuures markes of he CME provide a paricularly ineresing se of circumsances for invesigaing he impac of marke srucure on price discovery. Three producs essenially co-exis. The firs is he sandard fuures pi-conrac which

3 rades in he physical pi during he regular rading hours of 8:30 am unil 15:15 pm CST. The second is he corresponding elecronic produc of he same conrac size which rades on he GLOBEX exchange during he non-pi rading hours. Boh conracs can co-exis due o he differen pricing srucures which favour acion during regular rading hours where possible. The hird produc is he newer E-minis which rade only elecronically around he clock and whose size is around one-fifh of he size of he sandard conrac. This final caegory has experienced enormous growh in he pas five years, see CME (2005). The wo elecronic conracs, sandard size and E-mini, currenly co-exis for pricing reasons: for large players he sandard conrac is subsanially cheaper. Despie he rapid growh of he E-minis his paper concenraes on he sandard conrac due mainly o is imporance for he major players; imporanly, however, preliminary invesigaions reveal ha many of he paerns observed here are also apparen in he E-mini daa. While i is already known ha fuures markes lead spo markes in absorbing informaion, i has also become apparen ha elecronic rading may lead open oucry, for example Hasbrouck (2003), Kurov and Lasser (2004). Only relaively recenly have researchers begun o invesigae he elecronic ou of hours rade in fuures, see Barclay and Hendersho (2003). We describe he aciviy of he afer-hours equiy fuures marke in some deail in Secion 2. The marke shows clear characerisics of higher rade volume, volailiy and price changes wih news releases when hose news releases occur ouside he regular rading hours. The marke is found o be mos acive in erms of ransaced volume and volailiy in he wo hours immediaely preceding and immediaely following he opening hours of he NYSE. These are hours ha we regard as dominaed by US facors, wheher "news" from he US or reacions o overnigh evens by he US markes, and are also he hours in which many of he ECNs operae heir exended marke hours. The Asian rading period (from 19:00 o 1:00 CST) exhibis lile aciviy, bu he marke is significanly livelier in he European space (from 1:00 o 6:30 CST) alhough no comparable o he pre-open US period. However, he greaes price impac revealed by he VAR mehodology of Hasbrouck (1991) is uncovered in

4 he hinner volume, pos-close period. Price impac during afer-hours rading oherwise is relaively low. The paper proceeds as follows. Secion 2 describes he feaures of he ou-ofhours equiy fuures conracs for he S&P500 and NASDAQ 100. Secion 3 characerises he volume of rade in hese conracs, including he imporance of news effecs, while Secion 4 urns o measures of price impac in he differen ime zones, and measures of informed rading are discussed in Secion 5. Secion 6 concludes. 2. Round-he-Clock Equiy Fuures Markes Srong linkages beween equiy markes across ime zones are well documened. In general, price spillovers occur as price changes in he foreign markes (and relevan informaion) are incorporaed ino he local marke (Solnik, 1983; and Cho e al., 1986 on sock markes). In his vein, Eun and Shim (1989) sudy linkages among he sandard rading hours for nine developed sock markes and repor evidence of marke innovaions from he US flowing o he oher markes, wih limied evidence of foreign marke influence back o he US marke. Recen sudies of ECNs have concluded ha rade ou of regular rading hours improves price discovery and efficiency in he regular marke bu ha higher rading coss deer maximum price efficiency ouside of hours, see Barclay and Hendersho (2003), Barclay, Hendersho and Jones (2006). Rapid developmen in echnology has permied he move from floor-based markes o screen-based sysems. In mos markes he ransmission o elecronic rade has resuled in he complee loss of floor rading. However, in a couple of insances boh survive conemporaneously, noably in insrumens raded on he Chicago Mercanile Exchange (CME). For a number of equiy fuures conracs based on he S&P 500 and he NASDAQ 100 an open oucry pi operaes during he regular rading hours of 8:30am unil 3:15pm Cenral Sandard Time (CST). A second screen-based sysem operaes hrough he Global Exchange (GLOBEX) Trading Sysem. 1 A 1 GLOBEX is an inernaional, auomaed order enry and maching sysem which has a nework exending o en financial ceners, including New York, Chicago, London, Tokyo. I opens almos 24 hours a day wih down imes from 4:30 o 5:00 pm CST daily for mainenance and weekend closure from 3:15 pm CST Fridays o 6:00 pm CST Sundays.

5 summary comparison of he behaviour of he elecronic marke and he open oucry marke is found in Coppejans and Domowiz (1999) using E-minis daa. A plausible reason for he coninued exisence of he wo markes is he higher ransacions fees in he afer hours rading, (see he CME websie for deails of pricing srucures which vary wih ype of marke paricipan, volume ransaced and insrumen), bu can be generalised o he exen ha ou of hours rading is more expensive han during regular rading hours. [Inser Table 1 abou here] The sample of his paper concerns S&P500 and NASDAQ 100 fuures conracs which have cash selemen in March, June, Sepember and December on he close of he final rading day in each period, usually he Thursday closes o he 15h of he monh. Aciviy and ineres in his marke is growing rapidly, see CME (2005). The CME also repor specacular growh in opions raded on hese producs since heir inroducion in lae The basic characerisics of he conracs are given in Table 1. The daa for his paper have been obained from he CME and comprise unsigned rades posed on GLOBEX Trading Sysem. The sample covers he period from January 2003 o Sepember 2006, which in he case of he S&P500 conrac involves some 2 million observaions, and for he NASDAQ 100 abou 20% of ha a jus over 437,000 observaions. Our choice of he sandard raher han E-mini conrac is based parly on he consideraion ha large marke players coninue o ransac subsanial posiions in he sandard conrac. Alhough Hasbrouck (2003) has revealed ha he E-minis dominae price discovery over he open oucry movemen here has no, o our knowledge, ye been a sudy comparing he E-minis wih he sandard conracs. Par of he aracion of comparing E-minis wih he pi-conracs is ha hey are boh open conemporaneously, so ha i is possible o examine heir relaive efficiency, as in Hasbrouck (2003) and in Coppejans and Domowiz (1999).

6 The sandard conracs raded on he pi and elecronically do no overlap in heir rading periods beween he open oucry and elecronic markes; hey are he same conrac bu raded on differen rading plaforms wih differen clearing fees, alhough a rader can easily change posiions by operaing on eiher plaform. The relaive cos advanage of operaing in he sandard conrac during regular rading hours and he abiliy o use he same insrumen in he afer hours rade accoun for he coninued liquidiy in he elecronic afer-hours marke, despie he gains of he E- mini. The differences beween he open oucry and elecronic markes do mean ha i is more difficul o consruc comparisons on rading volume analogous o hose consruced for ECN rades on he NASDAQ by Barclay and Hendersho (2003). On he oher hand, he GLOBEX plaform ruly complees he ou of regular rading hours ime zone, as opposed o ECNs which merely exend he rading day (closing around 8pm EST and opening around 6.00am EST, alhough recenly opening has begun as early as 4:00am EST o cach he European rading zone). 3. Afer-hours volume Figure 1 illusraes he average daily volume ransaced in he S&P500 and NASDAQ 100 fuures conracs across a day for he period of January 2003 o Sepember 2006, wih he unis given as he number of conracs ransaced. The horizonal scale is he 24 hour clock for Cenral Sandard Time, and he dashed verical lines divide he day ino several ime zones. [Inser Figure 1 abou here] These ime zone designaions are given in Table 2 in a 24 hour clock for boh CST and GMT for ease of conversion (EST is he equivalen of CST+1 hour). These imes do no correspond o he full normal rading hours of exchanges in hose markes, wih he excepion of he Chicago pi period. The global rading day for boh equiies begins a 09:00 local ime in Tokyo, which is 19:00 CST. A 01:00 CST rading passes o London, where i is 07:00 GMT. Immediaely prior o he opening of he pi marke, and aligned wih 07:30 am in he New York markes, rading is

7 designaed as he pre-open period a 06:30 CST. This coninues unil he close of he GLOBEX rade immediaely prior (bu wih a 15 minue gap beween) he open of he Chicago open oucry pi a 08:30 CST. GLOBEX based rade resumes a 15:15 CST and we denoe he period unil 19:00 CST as he pos-close period. Wihin ha period he GLOBEX sysem closes for mainenance everyday beween 16:30 and 17:00 CST. [Inser Table 2 abou here] The elecronic marke displays a disinc inraday paern. During Tokyo rading hours here is no evidence of volume spikes, and he marke essenially remains quie unil European rade begins when a prominen rise in volume occurs a 02:00 CST (08:00 GMT). The pre-open period is he period of consisenly highes average rading volume per day on he Globex plaform. 2 The spike in volume in he preopening period is pronounced, and despie being only one-enh of he afer-hours rading day accouns for almos 30% of he oal volume ransaced per day over he sample period. Pos-close rade is also relaively high. A comparison of Figure 1 wih he corresponding rading ime breakdown for NASDAQ socks in Figure 1 of Barclay and Hendersho (2003) is revealing. Their figure covers he exended rading day from 06:00 EST o 20:00 EST for he op 250 NASDAQ socks by volume for he period March o December Despie he differences in daa source and sample period he figures show a somewha similar paern, wih a large morning volume peak and a smaller immediae pos-close volume peak. However, here are imporan differences in he iming of he volume peaks in he wo samples. In he spo NASDAQ daa of Barclay and Hendersho he peaks occur a 09:30 EST, afer he opening of he pi. The pre-open rade is relaively smaller, alhough hey do record ha i riples beween he half hour beginning 08:00 and 08:30, (by way of comparison he rade volume in he fuures daa rises by 73% and 78% for he S&P500 and NASDAQ respecively). The pos-close peak in our Figure 1 occurs a 15:30 CST, which is an hour laer han he pos-close peak Barclay and Hendersho (which is 15:30 EST). The fac ha he secondary peaks in boh markes occur immediaely afer he close suggess ha here is somehing abou he 2 Alhough heir sudy omied non-rading hours, Coppejans and Dommowiz (1999) also noed he high volume immediaely prior o opening, which hey aribued o pre-opening posiioning in he absence of a formal pre-opening mechanism such as found in oher markes.

8 closing ha is imporan o volume, raher han he release of informaion which should hi boh markes simulaneously. 3 One possibiliy is ha marke paricipans desire he anonymiy which can come via he elecronic afer-hours marke and are willing o pay he higher cos. 4 This prospec is scope for fuure work in linking o a behavioral finance model. [Inser Table 3 abou here] Table 3 gives he average daily volume in each ime zone in erms of he number of conracs raded. Unlike he afer-hours rade analysis in he NASDAQ by Barclay and Hendersho (2004) who repor an average of only 100 ransacions per day in each of he pre-open and pos-close periods, here is a subsanial volume ransaced during he afer-hour periods. The curren daase reveals ha he average number of conracs raded in he pre-open period each day is almos 730 for he S&P and 187 for he NASDAQ. The lowes rading period is he Tokyo period, which is also he longes of he samples in he day, poining o very low liquidiy in his ime zone. The final wo columns of Table 3 give he average number of rades per minue for each of he ime period. To make some comparison wih he open oucry pi, Hasbrouck (2004) records an average of 12 ransacions per minue for he S&P500 conrac. In afer-hours rading, he London ime zone rades he greaes number of conracs for boh insrumens - a some 3 conracs per minue. The shorer, more inense pre-open period records an average of 6 conracs per minue. Clearly he S&P500 fuures conrac has lower volume in he afer-hours han regular rading hours period, bu he difference is nowhere near as exreme as ha recorded in he ECN daa o dae. The NASDAQ figures are no as impressive; in 3 This observaion is based on he average of daa from wo differen samples and daa ses. Ideally he wo sample periods would correspond, however i seems unlikely ha his will affec he oucomes presened here. 4 We are graeful o paricipans a he Federal Reserve Bank of Alana Cambridge- RPI Conference on Financial Inegraion in November 2007 for discussions on his possibiliy. Speculaive aciviy is also a possibiliy in his marke, alhough i is usually ignored in mos analysis of marke srucure. Day raders are, however, arguably less presen in he larger conrac fuure indices under examinaion here han in he E-minis marke (a Google search on day rading and E-minis brings up over 100,000 enries).

9 London here is less han one conrac per minue rade, bu again his doubles o almos 1.6 per minue in he pre-open rade. The pre-open period can poenially incorporae a lo of informaion, in par due o he generally greaer number of raders acive in he US ime zone, bu no leas due o he presence of imporan news releases a 08:30 EST (07:30 CST), corresponding precisely o he iming of he spike in he volume daa. Immediaely following he close of he CME a 15:15 CST (which is equivalenly 16:15pm EST) here is a surge in aciviy. This average picure masks a slighly more complex se of scenarios. On many days here is lile aciviy pos close. In some days, however, relaively high volume occurs unil jus prior o he GLOBEX shu down a 16:30 CST. [Inser Figure 2 abou here] The disribuion of he number of conracs raded in his period is shown in Figure 2, here is clearly a long righ ail in he disribuion represening infrequen large numbers of conracs raded in his period, however, he average is no far from he median in boh markes. There are wo poenial explanaions for he rades in his period, eiher as informed rading in response o afer hours news releases or liquidiy rading as raders rush o close heir books prior o he poenially expensive exposure o overnigh rading; in all probabiliy here are elemens of boh ypes of rade presen. Combining he curren resuls wih he evidence in Barclay and Hendersho (2003) which also shows a volume peak jus pos-close, bu a an hour s remove from he curren applicaion is suggesive ha news canno be he oal explanaion Morning News Effecs Major US economic announcemens have been documened o affec a large number of financial markes, including foreign exchange (Payne, 1996), bonds (Fleming and Remolona, 1999) and equiies (Becker e. al., 1995). Mos US economic news is released a 7:30CST (he oher scheduled release imes of 9:00CST and 1:00 CST do no concern he curren sample).

10 [Inser Figure 3 abou here] Figure 3 shows he corresponding volumes raded for he average news and nonnews day in he curren sample days for he S&P index, he paerns in he NASDAQ are similar. The news days are caegorized as hose days on which any of he following major macroeconomic announcemens are released: PPI, reail sales, GDP, non-farm payrolls, CPI. The peak in pre-open volume shown in Figure 1 is clearly relaed o news evens, and here is some evidence ha news impacs he pos-close volume slighly also. Volume on hose days is subsanially higher han on he nonannouncemen days - for reference compare he verical scale of Figure 3 wih ha of Figure Afernoon News Effecs One possible reason for he aciviy in he pos-close period is he long sanding radiion of company announcemens in his period. Originally his was a sraegy inended o give markes sufficien ime o assess informaion properly before acing upon i, and so reducing unwarraned volailiy. However, wih he adven of exended hours rading his is clearly no longer he case, and in fac he announcemens may be emerging ino illiquid markes. In he curren applicaion he insrumen is a fuures conrac on an equiy index. No one componen of he index accouns for a subsanial proporion of he index, and, given he sop rules on exchanges, even a company announcemen which resuls in sufficien change in ha company's sock o resul in a sop should no direcly cause a subsanial change in he index. The announcemen has o become in some sense sysemic (or conagious) or provide informaion abou he general sae of he economy o have an impac. 5 The figures include he day following a public holiday in he daa. On hese days, some of which conain news announcemens, he CME rading hours differ from normal days, usually opening laer. This means ha here are some rades on GLOBEX recorded afer 9:00am for hose days. Afer checking ha hese days were no on average subsanially differen o he remainder of he sample, he rades in he pos 9:00am ime were deleed from he curren sudy, bu he usual GLOBEX rading imes on hose days were no. The perinen holidays are: New Year's Day, Marin Luher King's Birhday, Washingon's Birhday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veerans Day, Thanksgiving, Chrismas Day.

11 Liquidiy raders are expeced o close posiions a he end of rading days, being unwilling o hold he selemen risk and overnigh posiions. Brock and Kleidon (1992) in foonoe 2 of heir paper sae ha, even wih he possibiliy of 24 hour rade (as here), wihou coninuous selemen process raders would sill be mos likely o wish eiher o be a a zero or shor posiion overnigh. Barclay and Hendersho (2004) show ha waiing for cheaper regular rading hours is no necessarily advanageous o liquidiy raders, and ha here are profis o be made from liquidiy provision afer hours. The high poenial risk of reaining an open posiion overnigh leads o high demand for liquidiy a he end of he regular rading hours, and i is plausible ha wih he exended rading in spo markes due o ECNs and he developmen of he new 24 hour GLOBEX plaform a leas some of he pos-close volume seen in he equiy fuures marke is liquidiy rading. However, comparisons beween resuls for individual socks and sock indices such as here are complicaed by differen incenives for rading hese differen insrumens. The price impac resuls calculaed in Secion 4 reveal ha he pos-close marke for he equiy fuures index is relaively expensive rade. I is possible ha he characerisics are consisen wih a rush o mee end of day limis by he marke paricipans. In his paper, however, we concenrae on he exen o which rade can be ascribed o informaion arrival. To examine he poenial impac of company news announcemens we consider paricularly company earnings announcemens occurring in he pos-close period. Quarerly earnings releases for many large firms regularly occur in he pos-close periods during January, April, July and Ocober each year. Denoing each of hese four monhs as he announcemen monhs, Table 4 shows he average number of conracs raded per day during he ime period of 3:30 o 4:15 CST in each of he earnings announcemen monhs as a proporion of he average number of conracs raded per day in he 3:30 o 4:15 CST period. [Inser Table 4 abou here] The daa for he earnings monhs are compared wih he remaining monhs in he year via he column labeled Res. Thus he NASDAQ resuls indicae ha he conracs raded in he earnings monhs are greaer han during he oal sample (as he raio is above 1 in each case), and subsequenly in non earnings announcemen

12 monhs he raio of conracs raded is only 0.76 of he oal sample. In he case of he S&P 500 he earnings announcemen monhs are also higher han he average for he year and lower in he Res. The dispariy is no as grea wih he S&P500 as he NASDAQ - poenially reflecing more high-ech socks wih earnings releases in he pos-close period in general, possibly due o heir Wes Coas locaion. The monh wih he larges number of conracs raded is clearly Ocober in boh indices. This may be a consequence of (previously noed) higher fourh quarer responsiveness o revisions for he nex year's oulook (see Cornell and Landsman, 1989). Alhough he sample averages are higher in he announcemen monhs, he difference is no saisically significan. In examining he ails of he disribuions given in Figure 2, a number of he larges numbers of conracs raded coincide wih earnings announcemens for he high ech companies, for example IBM, Microsof, Inel, Google, Yahoo!, Dell, Texas Insrumens, which are primarily locaed on he Wes Coas of he US. There are however, a subsanial number of days in he ails of he wo disribuions which are ou of earnings announcemen monhs and do no seem o be associaed wih news abou paricular companies. For boh indices we examined he 24 days in he ail of he disribuion, making up 3.3% (3.2%) of he disribuion for he NASDAQ (S&P500). The amouns raded in his ail range from 169 o 394 conracs for he NASDAQ and 393 o 1147 conracs for he S&P500. Of hese 24 days, 5 occurred ouside of he earnings announcemen monhs in he NASDAQ and 9 in he S&P 500. These days are shown in Table 5; wo days were common o boh indices (4 February 2003, 25 Sepember 2003). As indicaed in Table 5, six of hese days could be associaed wih general economic condiions raher han specific news releases. Mos relevan news relaed o general economic or poliical news condiions. In paricular, for boh indices, he following were recorded in news repors: miliary acion agains Iraq (6 March 2003); general economic daa released earlier in he day (4 February 2003, 14 Augus 2003, and 23 May 2006); and perceived weakness or merger aciviy in he echnology secor (2 June 2003, 3 February 2004, and 23 May 2006).

13 [Inser Table 5 abou here] On he remaining 6 days in he ail here was no readily idenifiable news generaing aciviy. The mixure of resuls here, suggess ha here is some underlying level of liquidiy rade in his marke, overlaid wih informed rade on he back of news announcemens. Marke paricipans clearly find meri in being involved in his marke in order o respond o price changes as he resul of ou of normal rading hours news as well as for end of day rading Weekend Effecs The anomalous behaviour of many asse prices over weekends has been recorded across equiy markes. The GLOBEX fuures marke ceases rading for he weekend on Fridays a 15:15 CST and reopens a 18:00 CST on Sunday evening (which corresponds o 08:00 am Monday morning in Tokyo and 09:00 am in Sydney, local ime). Aciviy in his early Monday morning rading period is repued o be quie pronounced, as he news of he weekend is absorbed ino he marke well ahead of he opening of he floor raded fuures or spo markes for he equiy indices. However, Figure 4 show ha he volume of Sunday evening rade in he S&P500 is no more pronounced han ha of any oher average day, he same holds rue for he NASDAQ (no shown here). [Inser Figure 4 abou here] However, when early Monday morning rade is compared wih he average rade on no-news days i is quickly seen ha he average volume on Monday mornings is greaer. 6 Bu he Monday morning rade is lower han on he average news day. These resuls are paricularly ineresing, as hey show how easily marke microsrucure can be masked. There is a definie weekend effec presen in he daa bu i is no iniially eviden wihou specifically accouning for news announcemens. 6 Two Monday mornings in he sample included news announcemens. Excluding hem from he weekend effecs makes lile difference o he repored resuls.

14 Exising lieraure also pinpoins he so-called `riple wiching days', when index fuures, index opions and sock opions simulaneously expire; and are eiher paid ou or rolled over as high volume days, see paricularly Barclay, Hendersho and Jones (2006) who examine he NASDAQ and S&P500 in his conex. They find ha here is evidence of higher volume in underlying sock movemens associaed wih hese indices. The curren daa are based on he generic index published by he CME (he CME deermines when rade swiches from he neares o he nex-o-neares fuures conrac prior o he expiraion dae). There is no evidence of higher volume in he pre-open volume in boh fuures indices on he riple wiching days in he curren sample. 4. Afer-hours Price Impac Informaion-based microsrucure models demonsrae ha new informaion becomes impounded in prices as a resul of rading by informed raders. Glosen and Milgrom (1985) and Easley and O'Hara (1987) sugges ha rades can signal informaion - associaed paricularly wih informed raders. Trades, in hemselves, could herefore affec he behavior of prices. In afer-hours rading when poenially fewer informed raders are acive, and volume is lower, here is a srong presumpion ha price impac will be higher; for example Barclay and Hendersho (2003). To invesigae price impac we adap he Hasbrouck (1991) VAR mehodology o he non-coniguous ime zones examined in his paper. The Hasbrouck (1991) model uses a Wold ordered bivariae vecor auoregression represenaion of rade volume and price revision. Specifically he VAR can be represened as By A( L + ε (1) = ) y 1 where y = { x, r }, which are respecively defined as he signed volume raded, x, and he price revision, r. The marix B is 2x2 lower riangular wih ones on he main diagonal represening he normalizaion adoped. Tha is

15 1 B = β The marices A (L) are full marices of lagged impac coefficiens and ε represen emporally uncorrelaed srucural shocks o he sysem where ε ~ N(0, ) and is diagonal and posiive definie. The Hasbrouck mehod explois he one o one relaionship beween shocks o ε and conemporaneous changes in y o inerpre he coefficien, - β 21, as he measure of he iniial price impac of a rade. Subsequen values of he lagged coefficiens are used o give he ransmission pah of prices back o equilibrium, ha is he impulse responses o he shock. As he daa used are ransacion by ransacion, raher han equally spaced inervals, he criical, bu relaively unconroversial, assumpion in he use of his mehodology is ha he daa display covariance saionariy. This model has been widely applied o consideraions of price impac in financial marke daa. In Hasbrouck (1991) he iniial applicaion considers x as a variable aking he values of {1,-1,0} depending on wheher he ransacion is idenified as a buy, sell or non-idenified ransacion. The zero values were hen eliminaed from he analysis. Hasbrouck also augmened his wih acual signed volume and signed quadraic volume. Unforunaely he curren daa se does no conain quoes or informaion on ransacion direcion, and hese limiaions provide us wih several challenges in implemening he Hasbrouck mehod. In wha follows we address he problems of dealing only wih ransacions based daa. There is now a significan lieraure on signing ransacions when his is no clearly idenified in he original daa. The quoe mehod (used by Hasbrouck) idenifies a buy (sell) as he case when he rade price is above (below) he mid-poin of he prevailing bid and ask quoes. The ick mehod assigns a buy (sell) o he case where here is an increase (decrease) in he rade price, and akes accoun of cases where here is no change in price by assigning i he same direcion as he previous ransacion. More sophisicaed algorihms for assigning rade direcion are hose of Lee and Ready (1991) which is based on using he quoe es for rades no conduced a he mid-quoe where he ick es is used insead, as also used for example in

16 Barclay and Hendersho (2004). Ellis, Michaely and O'Hara (2000) furher modified his by reducing he role of he quoe es o only hose rades conduced a he ask and bid prices and expanded he ick es o all oher observaions. Some comparisons of he success of hese algorihms for rade classificaion exis, boh Finucane (2000) and Theissen (2001) found ha he ick es did no underperform compared wih he Lee and Ready (1991) ess, while Ellis, Michaely and O'Hara found ha he Lee and Ready es improved classificaion by some 5 percen of observaions over he ick and quoe ess, and heir own innovaion improved on his again. Madhavan, Ming, Srasser and Wang (2002) compared he Lee and Ready and he Ellis, Michaely and O'Hara ess finding ha dominance of one or oher depends on he marke under consideraion. Unforunaely, in he curren daase here are insufficien observaions on quoes o use he quoe based mehods, so he ick es is he only one available. I is worh noing ha he above papers repor correc classificaions of around 75-80% of ransacions via he ick mehod, and perhaps a furher 5% improvemen using he more sophisicaed combinaions of quoe and icks. The absence of quoe daa may poenially produce a more imporan problem han simply signing he rade. Bid-ask bounce may seriously disor he srucure of he covariance marix in he sample daa away from ha of he rue underlying price process, inroducing negaive serial correlaion ino he reurns process. Hasbrouck (2004) provides a simple demonsraion of he poenial exen of he problem. Consider he case where bid and ask prices are separaed by an execuion cos, c, and he preferred mid-quoe daa disribues hese coss equally on eiher side. When ransacion daa are used hese execuion coss are implicily assumed o be zero, and his undersaemen is eviden in non-zero auocovariance erms beween he reurns. Following Hasbrouck (2004), he observed price, p is b if q = 1 p =, a if q = + 1 where b and a represen he bid and ask prices, and q is he rade direcion. The underlying process driving hese observed prices is given by he efficien price, m

17 which is a random walk wih random news arrival u ~N(0,σ 2 ), and execuion coss, so ha b = m c < m + c = a. In his case, one means of esimaing he execuion cos, c, is via he expression for he auocovariance of he reurns. Period by period reurns under his model can be expressed as p = c q + u and he assumpion of independence beween he execuion cos and he news arrival means ha he 2 auocovariance for he reurns is given by Cov( p, p ) =. Hence, he 1 c auocovariance properies of he daa give an esimae of he execuion cos under he assumpions of he model. However, he form of he paricular model is quie resricive, and does no specifically accoun for he clusering of arrivals seen in daa or ha he execuion coss may be ime varying or asymmeric. Hasbrouck (2004) proposes a Markov Chain Mone Carlo approach o ake ino accoun he disribuion of execuion coss poenially eviden in he sample. Using relaively uninformaive priors, simulaions of he daa are drawn using a Gibbs sampler o generae a poserior densiy over he unobserved rade direcion from he observed price daa. The mehod requires a specificaion of he price formaion process, such as given above. Hasbrouck uses his simple case o compare measures of he execuion cos from he auocovariance properies of sample daa on four fuures conracs wih Bayesian esimaes of execuion cos and finds ha he former seem o be a major overesimae of c. The source of his bias is he independence assumpion in he expression for he auocovariance given above in deriving such an expression we assume independence beween news and rade direcion in non-conemporaneous periods, bu his is no explicily imposed in he Bayesian esimaes. Clearly he model resuls sugges here is subsanial feedback beween news and direcion of rade across successive ransacions. Despie he insighs i offers, he simple model is unlikely o be saisfacory. In a slighly more complex specificaion, where raders ake ino accoun he informaion revealed by previous price impac in deermining he efficien price, he esimae of execuion cos is slighly higher, alhough sill well below ha of he auocovariance properies of he sample. Hasbrouck concludes ha he Bayesian esimaes of he execuion coss are generally in he same direcion as hose generaed by he simple

18 sample properies, and i seems likely ha he laer are subsanial overesimaes of he rue values. The use of Bayesian echniques o esimae rade direcion is a promising area of fuure research for he case where only ransacion daa are available. I requires a srong model of he underlying price process including disribuional assumpions, and echnical implemenaion is no always sraighforward due o difficulies wih empirical convergence. Wha currenly does seem clear is ha he auocovariance properies of he sample provide an overesimae of he cos, while i is no ye eviden how much of he observed price change should be assigned o direcion of rade, and how much o oher coss. To ge an idea of he poenial exen of he problem of non-zero execuion coss in he curren applicaion we calculaed he sample auocovariances for he NASDAQ and S&P500 reurns for each ime zone. The resuls given in Table 6 show relaively small execuion cos esimaes, wih hose for he S&P500 abou one quarer of he esimaes for he NASDAQ. Addiionally, here is some evidence ha he coss are slighly higher during he pre-open period compared wih he oher subperiods, reflecing he desirabiliy of rading in his period when here is ofen significan public news arrival. An esimae using Bayesian echniques is lef for fuure research, a his sage having ascerained ha here is some degree of he problems idenified by Hasbrouck presen in he curren sample. [Inser Table 6 abou here] To invesigae he price impac effecs during differen ime zones i is necessary o conrol for he cross day effecs. This was done by rimming he observaions in each sub period sufficienly o include he desired lags wihin he period - o avoid crossing eiher days (which happens wih he inroducion of a simple day change dummy) or ime zones. 7 The conemporaneous and cumulaive price impac from a VAR(5) specificaion of equaion (1) are repored in Table 7 for each of he ime zones, where x is he 7 An alernaive specificaion would be o rea he VAR as he same hroughou he afer-hours rading and inroduce a series of ime zone dummies akin o he approach of Dufour and Engle (2000) who include ime of day dummies. Experimens along hese lines proved unsaisfacory due o he difficuly in conrolling for lag effecs across he differen periods.

19 signed rade volume (no he sign of rade as in Hasbrouck's original esimaes), based here on he ransacions prices raher han mid-quoes as discussed previously. The cumulaive impulse responses repored are calculaed for he 20 h period horizon, which is represenaive of ime horizons from 10 periods onwards. Sensiiviy analysis o including addiional variables in he form of he sign of rade and he signed square of raded volume o accoun for nonlineariies, as suggesed in Hasbrouck, did no make a discernible impac on he coefficiens repored in Table 7, nor did changes in he lag srucure of he VAR have a subsanive impac. The choice of a VAR(5) follows he exising lieraure such as Dufour and Engle (2000) as sandard informaion ess end o sugges excessively long lag lenghs. The exising lieraure is ad hoc in is choice of lag lengh, wih lags ou o as far as 100 ransacions in some cases. [Inser Table 7 abou here] In all afer-hours rading zones he price impac is posiive and saisically significan a 5 percen for boh indices. The significance of he price impacs is robus o he poenial problems wih he covariance marix associaed wih he ransacions daa, boosrapping does no change hese resuls. 8 The iniial price impac in Tokyo shows ha a one uni buy rade is associaed wih a price increase of in he S&P500 fuures index and in NASDAQ fuures. In London he iniial price impac is slighly lower for boh indices. The mos ineresing periods are he pre-open and pos-close. In he pre-open period, which has already been seen o be high volume, and paricularly influenced by macroeconomic news announcemens, he iniial price impac coefficien is saisically significan for boh markes a and for he S&P500 and NASDAQ respecively. However, in he pos-close period he price impac in boh markes is saisically significanly higher, a for he S&P500 and for he NASDAQ. However, he price impac in he posclose for he S&P500 remains below ha of he Tokyo and London ime zones. The cumulaive price impacs repored show a similar paern, 8 The esimaed covariance marices of residuals in each VAR are srongly diagonal in each case, here is no subsanive evidence of non-zero covariance erms.

20 During he pre-open period he price impac is significanly lower han price impac in he oher ime zones considered. This is he highes rading volume period. Price impac during he period of nex greaes volume, he pos-close is significanly higher, and in he case of he NASDAQ he highes of all he periods considered. This is a low volume rading period, on average no greaer han volume in eiher Tokyo or London. Barclay and Hendersho (2004) find he opposie resul for individual socks, in ha he iniial price impac in individual socks is higher in he pre-open han pos-close period when measured using effecive spreads (alhough comparisons across differen insrumens, such as beween equiy fuures and individual sock prices are difficul o make). 5. Public and Privae Informaion in Afer-Hours Markes The wo periods of paricular ineres in afer-hours rading are he pre-open and posclose. A poenial difference beween hese periods is he ype of informaion released. In he pos-close period informaion is ofen likely o be company or secor specific, relaing o oucomes in paricular socks. In he pre-open period, as seen above, informaion is mos likely o relae o public announcemen of macroeconomic aggregaes. These wo ypes of informaion may be reaed quie differenly in he markes. Poenially he highly acive pre-open period announcemens are very public and raders are relaively well informed on heir impac and have pre-formed expecaions on how hey will reac, so he informaion in he sense of asymmery beween players is less pronounced han for company specific announcemens which may occur in he more hinly raded pos-close marke. Easley, Kiefer and O'Hara (1997) develop a means of assessing he proporion of informed and uninformed (or liquidiy) rades in oal rading aciviy using he proporion of informed rade measure deduced from rade direcion, or PIN (Probabiliy of INformaion-based rading). This relies on a Bayesian ree sylized analysis of how markes reac following news arrival. Unforunaely he mehodology

21 does no ransfer well ino our applicaion, producing only corner soluions. 9 Recenly, Benos and Jochec (2007) have hrown empirical doub upon his measure. The sandard vecor moving average represenaion of a VAR faciliaes a forecas error variance decomposiion of he sources of movemens in variables under he assumpion ha he shocks are independenly disribued. Previous auhors have inerpreed he conribuion of volume shocks o variaion in reurns as he proporion of price discovery due o privae informaion, see Barclay and Hendersho (2003). [Inser Table 8 abou here] The resuls presened in Table 8 sugges ha he role of privae informaion is around one-hird of oal. For he pre-open period his is similar o ha observed in Barclay and Hendersho (2003) who examine elecronic rading for individual NASDAQ socks ou of hours. However, hey find a relaively smaller privae informaion componen in he pos close, a around 25%, whereas in he curren work he share is relaively unchanged across all he ime zones Conclusion This paper has considered he afer-hours rading marke for CME equiy regular fuures conracs on he S&P500 and NASDAQ 100 raded on he GLOBEX elecronic plaform. To our knowledge i is he firs paper o sudy such a marke. In equiy markes he spo marke ECNs cover exended hours bu no full 24 hour rade. Volume in elecronic rade in fuures was shown o be highes in he wo periods immediaely surrounding he opening hours for he CME pi for hese insrumens, noably from 6:30am o 8:15amCST and 3:30pm o 7:00pmCST (chrisened he preopen and pos-close periods). High volumes in he pre-open period were shown o be paricularly associaed wih anicipaed macroeconomic news releases for he US economy, which occur a 8:30EST prior o he opening of he spo rading floor. Informed rade seems o conribue approximaely equivalenly during all ime zones 9 The PIN akes he value of 1/3 when each of he esimaed parameers akes a corner value of one. Invesigaions revealed ha his was paricularly he case as he number of observaions increased. 10 The horizon for he variance decomposiion makes very lile qualiaive difference as he resuls sele o he decomposiions repored here very quickly.

22 across he day. However, price impac was shown o be saisically significanly higher in he pos-close period han he pre-open. If liquidiy raders do need o sele overnigh posiions in he pos-close rade i may be relaively expensive o do so, and if his is being done as a means of preserving anonymiy in he marke, hen i provides a direc measure of he cos of ha service. References Andersen T., Bollerslev, T. Diebold, F.X., & Vega, C. (2006). Real-Time Price Discovery in Sock, Bond and Foreign Exchange Markes. Journal of Inernaional Economics, forhcoming. Barclay, M.J., & Hendersho, T. (2004). Liquidiy Exernaliies and Adverse Selecion: Evidence from Trading afer Hours. Journal of Finance, 59, Barclay, M.J., & Hendersho, T. (2003). Price Discovery and Trading Afer Hours. The Review of Financial Sudies, 16 (4), Barclay, M.J., Hendersho, T., & Jones, C.M. (2006). Order Consolidaion, Price Efficiency and Exreme Liquidiy Shocks. Journal of Financial and Quaniaive Analysis, forhcoming. Becker, K., Finnery, J., & Friedman, J. (1995). Economic News and Equiy Marke Linkages beween he US and UK. Journal of Banking and Finance, 19, Bennos, E., & Jochec, M. (2007). Tesing he PIN variable. Universiy of Illinois, manuscrip. Available a SSRN, absrac Brock, W., & Kleidon, A. (1992). Periodic Marke Closure and Trading Volume: A Model of Inraday Bids and Asks. Journal of Economic Dynamics and Conrol, 16, Chicago Mercanile Exchange (2005). CME Equiy Index Fuures and Opions: Informaion Guide. CME, available a hp://

23 Cho, D., Eun C., & Senbe L. (1986). Inernaional Arbirage Pricing Theory: An Empirical Invesigaion. Journal of Finance, 41, Coppejans, M., & Domowiz, I. (1999). Pricing Behavior in an Off-hours Compuerized Marke. Journal of Empirical Finance, 6, Cornell, B., & Landsman, W.R. (1989). Securiy Price Response o Quarerly Earnings Announcemens and Analyss' Forecas Revisions. Accouning Review, 64, Dufour, A., & Engle, R. (2000). Time and he Price Impac of a Trade. Journal of Finance, 55 (6), Easley, D., Kiefer, N.M., & O'Hara, M. (1997). The Informaion Conen of he Trading Process. Journal of Empirical Finance, 4, Easley, D., & O'Hara, M. (1987). Price, Trade Size, and Informaion in Securiies Markes. Journal of Financial and Quaniaive Analysis, 24, Ellis, K., Michaely, R., & O'Hara, M. (2000). The Accuracy of Trade Classificaion Rules: Evidence from NASDAQ. Journal of Financial and Quaniaive Analysis, 35, Engel, R. F., Io T., & Lin, W. (1990). Meeor Showers or Hea Waves? Heeroskedasic Inra-Daily Volailiy in he Foreign Exchange Marke. Economerica, 58, Eun, C., & Shim, S. (1989). Inernaional Transmission of Sock Marke Movemens. Journal of Financial and Quaniaive Analysis, 24, Finucane, T.J. (2000). A Direc Tes of Mehods for Inferring Trade Direcion from Inra-Day Daa. Journal of Financial and Quaniaive Analysis, 35,

24 Fleming, M.J., & Remolona, E. (1999). Price Formaion and Liquidiy on he US Treasury Marke: The Response o Public Informaion. Journal of Finance, 54, Glosen, L., & Milgrom P. (1985). Bid, Ask and Transacion Prices in a Specialis Marke wih Heerogeneously Informed Traders. Journal of Financial Economics, 14, Hasbrouck, J. (2004). Liquidiy in he Fuures Pis: Inferring Marke Dynamics from Incomplee Daa. Journal of Financial and Quaniaive Analysis, 39, Hasbrouck, J. (2003). Inraday Price Formaion in he US Equiy Index Markes. Journal of Finance, 58, Hasbrouck, J. (1991). Measuring he Informaion Conen of Sock Trades. Journal of Finance, 46, Huang, R., & Masulis, R. (1999). FX Spreads and Dealer Compeiion Across he 24- Hour Trading Day, Review of Financial Sudies, 12 (1), Kurov, A., & Lasser, D. (2004). Price Dynamics in he Regular and E-Mini Fuures Markes. Journal of Financial and Quaniaive Analysis, 39, Lee, C., & Ready, M. (1991). Inferring Trade Direcion from Inraday Daa. Journal of Finance, 46, Madhavan, A., Ming, K., Sraser, V., & Wang, Y. (2002). How Effecive are Effecive Spreads? An Evaluaion of Trade Side Classificaion Algorihms, manuscrip, Invesmen Technology Group, New York, downloadable from hp:// Payne, R. (1996). Announcemen Effecs and Seasonaliy in he Inra-day Foreign Exchange Marke. FMG Discussion Paper 238, Financial Markes Group.

25 Solnik, B. (1983). Inernaional Arbirage Pricing Theory. Journal of Finance, 38, Theissen, E. (2001). A Tes of he Accuracy of he Lee/Ready Trade Classificaion Algorihm. Journal of Inernaional Financial Markes, Insiuions and Money, 11,

26 Table 1 Characerisics of he S&P500 and Nasdaq fuures conrac Globex rading Conrac size Nasdaq: $100 imes he index S&P 500: $250 imes he sock price index Minimum flucuaion 1 poin = $2.50 Conrac lising March, June, Sepember, December Las day of rade Trading limis Trading hours Monday-Thursday Thursday prior o hird Friday of conrac monh 5.0% increase or decrease from prior selemen price 5:00 pm CST - 8:15 am CST 3:30 pm CST - 4:30 pm CST Shudown 4:30 pm CST - 5:00 pm CST Sunday and holidays 5:00 pm CST - 8:15 am CST Source: CME web page: Table 2 Designaed ime zones and rading hours in CST and GMT Designaed number of CST hours GMT hours ime zone hours Tokyo 19:00-01:00 01:00-07:00 6 London 01:00-06:30 07:00-12: pre-open 06:30-08:15 12:30-14: Chicago pi 08:30-15:15 14:30-21: pos-close 15:15-19:00 21:15-01: marke closure 16:30-17:00 22:30-23:00 0.5

27 Table 3 Average daily volume in differen imezones for he S&P 500 and Nasdaq 100 fuures conracs (January 2003 o Sepember 2006) Timezone number of rades per minue conracs S&P S&P 500 Nasdaq Nasdaq 500 Tokyo London pre-open pos-close oal afer-hours Table 4 Average conracs raded per day in he period 3:30 o 4:15 CST in each index by monh as a proporion of he oal average conracs raded per day in he period S&P 500 Nasdaq 100 January April July Ocober Res

28 Table 5 Large rading volumes occurring in non-earnings announcemen monhs and associaed news Index Dae Trades News S&P 04-Feb manufacuring growh ND 640 S&P 27-Feb ND 06-Mar Iraq S&P 02-Jun sofware company mergers, bioech S&P 05-Aug S&P 14-Aug beginning daa and rising Treasury yields S&P 25-Sep ND 171 ND 03-Feb manufacuring, weakness in echnology secor S&P 10-Aug ND 02-Dec S&P 31-Oc S&P 23-May weakness in echnology, economic growh Table 6 Esimae of execuion cos from auocovariance of he sample price daa, c Cov p p ) = ( 1 S&P 500 Nasdaq Tokyo London pre-open pos-close

29 Table 7 Iniial and cumulaive 20 h period price impac for he S&P 500 and Nasdaq 100 fuures conracs (July Sepember 2006) Timezone price impac β 21 S&P 500 Nasdaq 100 cumulaive price price impac impac 20 h β period 21 cumulaive price impac 20 h period Tokyo London pre-open pos-close Noe: All esimaes are saisically significan a 5% Table 8 Proporion of privae informaion variance decomposiion (% of oal variance in reurns due o shocks in volume raded a he 50 observaion horizon) S&P 500 Nasdaq Tokyo London pre-open pos-close

30 London pre open Chicago pi pos close Tokyo NASDAQ S&P :00 6:30 8:15 CST 15:30 19:00 24:00 Figure 1: Average Volume in S&P500 and Nasdaq 100 fuures conracs by 15 minue inerval (January Sepember 2006) S&P 500 Nasdaq 100 number of days number of conracs raded Figure 2: Disribuion of he number of S&P 500 and Nasdaq 100 conracs raded in pos-close ime-zone (3:30 ill 4:15pm CST)

31 London pre open Chicago pi pos close Tokyo news nonews :00 6:30 8:15 CST 15:30 19:00 24:00 Figure 3: Average Volume in S&P500 fuures conracs on news and nonews days, January Sepember pos close Tokyo London pre open Chicago pi Sunday nonews news non-sunday :15 19:00 1:00 Sunday 6:30 8:15 Monday Figure 4: Average volume: Sunday, non-sunday, news, and no-news days