LIQUIDITY OF FUTURES MARKETS OVER THE LAST QUARTER OF A CENTURY: TECHNOLOGY & MARKET STRUCTURE VERSUS ECONOMIC INFLUENCES

Abstract

This study examines the major technological and market forces that have acted on the liquidity of futures markets over almost the last quarter of a century – equivalent to Professor Robert Webb’s tenor as Editor-in-Chief at the Journal of Futures Markets. We examine the impact of electronic trading replacing open outcry, the impact of high-frequency trading and co-located trading, compare the liquidity impacts of these developments with the impact of major economic events, including the Global Financial Crisis and Covid-19 Pandemic. Using a stock index futures contract traded on Australian futures exchanges as an example, we find that technological advances have had a statistically significant but almost imperceptible influence on measures of liquidity of Australian futures contracts. In contrast, economic crises, and crashes such as the Global Financial Crash and the Covid-19 crash have had a massive and sustained impact on the liquidity of futures markets. Our results suggest that liquidity effects from technological innovations, while important, remain dwarfed by those from extreme outlier events.