Demutualization and enforcement incentives at self-regulatory financial exchanges

n the last few years, many of the world’s largest financial exchanges have converted from mutual, not-for-profit organizations to publicly-traded, for-profit firms. In most cases, these exchanges have substantial responsibilities with respect to enforcing various regulations that protect investors from dishonest agents. We examine how the incentives to enforce such regulations change as an exchange converts from mutual to for-profit status. In contrast to oft-stated concerns, we find that, in many circumstances, an exchange that maximizes shareholder (rather than member) income has a greater incentive to aggressively enforce these types of regulations

The puzzle of privately-imposed price limits: are the limits imposed by financial exchanges effective?

Some of the world’s largest futures exchanges impose daily limits on the price movements of individual contracts. Using data from three of the most active US commodity futures contracts, we show that these price restrictions are largely ineffective because traders are able to take similar positions using other contracts. When price limits become binding on the futures market, the associated (but unrestricted) options market becomes the price discovery market: much of the trading that would have occurred on the futures market migrates to the options market, and options prices accurately predict the (unconstrained) futures price the next day. We also show that the presence of options mitigates the effect of price limits on information revelation by documenting that futures markets reflect more accurate information on days following limit hits when the associated options were trading on the previous day. Overall, our evidence suggests that price limits in US futures markets have little effect on prices when options markets exist.Price limits, Regulatory evasion, Put-call parity, Satellite market, Price discovery

The puzzle of privately-imposed price limits: are the limits imposed by financial exchanges effective?

Some of the world’s largest futures exchanges impose daily limits on the price movements of individual contracts. Using data from three of the most active US commodity futures contracts, we show that these price restrictions are largely ineffective because traders are able to take similar positions using other contracts. When price limits become binding on the futures market, the associated (but unrestricted) options market becomes the price discovery market: much of the trading that would have occurred on the futures market migrates to the options market, and options prices accurately predict the (unconstrained) futures price the next day. We also show that the presence of options mitigates the effect of price limits on information revelation by documenting that futures markets reflect more accurate information on days following limit hits when the associated options were trading on the previous day. Overall, our evidence suggests that price limits in US futures markets have little effect on prices when options markets exist

The puzzle of privately-imposed price limits: are the limits imposed by financial exchanges effective?

Some of the world’s largest futures exchanges impose daily limits on the price movements of individual contracts. Using data from three of the most active US commodity futures contracts, we show that these price restrictions are largely ineffective because traders are able to take similar positions using other contracts. When price limits become binding on the futures market, the associated (but unrestricted) options market becomes the price discovery market: much of the trading that would have occurred on the futures market migrates to the options market, and options prices accurately predict the (unconstrained) futures price the next day. We also show that the presence of options mitigates the effect of price limits on information revelation by documenting that futures markets reflect more accurate information on days following limit hits when the associated options were trading on the previous day. Overall, our evidence suggests that price limits in US futures markets have little effect on prices when options markets exist

The Puzzle of Privately-Imposed Price Limits: Are the limits Imposed by Financial Exchanges Effective?

Some of the world�s largest futures exchanges impose daily limits on the price movements of individual contracts. Using data from three of the most active US commodity futures contracts, we show that these price restrictions are largely ineffective because traders are able to take similar positions using other contracts. When price limits become binding on the futures market, the associated (but unrestricted) options market becomes the price discovery market: much of the trading that would have occurred on the futures market migrates to the options market, and options prices accurately predict the (unconstrained) futures price the next day. We also show that the presence of options mitigates the effect of price limits on information revelation by documenting that futures markets reflect more accurate information on days following limit hits when the associated options were trading on the previous day. Overall, our evidence suggests that price limits in US futures markets have little effect on prices when options markets exis