Auction Designs and Futures Price Behavior: Evidence from the Taiwan Futures Market

This paper analyzes the impact of the transfer from a call auction to continuous trading on futures price behavior. Using tick by tick data from the Taiwan Futures Exchange (TAIFEX), the empirical results show that the reduction in the costs of information asymmetry and an improvement in price efficiency are achieved at the expense of the decrease in market liquidity when the TAIFEX transfers from a call auction to continuous trading. Additionally, this paper finds that the relative rate of price discovery for heavily traded futures contracts increases following the transfer to continuous trading, implying that continuous trading is more suitable for heavily traded futures contracts. Overall, the empirical results indicate that auction designs have impact on futures price behavior.