Price Discovery in the Limit Order Book of KOSPI 200 Futures on CME Globex

woobaiklee; Min Cheol Woo

Journal of Insurance and Finance

2013, 24(2), pp.99-139
Publisher : Korea Insurance Research Institute
Research Area : Business Management

woobaiklee ¹ , Min Cheol Woo ²

¹ 한국방송통신대학교
² 한국거래소

ABSTRACT

The trading of KOSPI 200 futures, the limit order book plays a significant role in providing liquidity on this electronic derivatives market. This paper presents the informational content of price discovery and the pattern of liquidity provision in the limit order book of KOSPI 200 futures listed on the CME Globex spanning a sample period from January 2011 to November 2011. Trading of KOSPI 200 futures on the CME Globex platform, which was launched in November 2009, starts at 18:00 and closes at 05:00 the next morning. Using the Vector Error Correction Method to estimate the “information share” of quotes as suggested by Hasbrouk (1995), we find the best quotes contribute more to price discovery than limit orders from 2 to 5. Furthermore, we find that aggressive limit orders are more informative than best quotes in the price discovery process. The information share of best quotes is concentrated at the opening and closing of trading, which resembles a “U-shaped“pattern. In contrast, contributions of the remaining quotes from the limit order book to the price discovery process show a “reversed U-shaped” pattern during the trading session. Our results suggest that informed traders seem to submit limit orders strategically,discriminating between best quotes and other remaining quotes in the limit order book within the trading day.
KEYWORDS

Globex , limit order book , liquidity , nighttime market , price discovery
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