Understanding spread in the electronic futures markets: financial crisis perspective

ABSTRACT

This article analyses bid–ask spreads in U.S. electronic futures markets around the recent financial crisis. We decompose the bid–ask spread into three components – order processing, inventory holding and adverse selection costs – and show that adverse selection costs increased the most during the crisis while order processing costs are the largest cost component. Volume significantly affects inventory holding and order processing costs, whereas volatility only influences inventory holding costs. The crisis period had a significant effect on these relations. This study extends the existing literature on liquidity in equity to futures markets.

KEYWORDS:

• Bid–ask spreads
• futures markets
• financial crisis
• adverse selection

JEL CLASSIFICATION:

• G13

Disclosure statement

No potential conflict of interest was reported by the authors.