Order Flow Persistence in Equity Spot and Futures Markets: Evidence from a Dynamic Emerging Market

Order flows have important implications for well-functioning financial markets because they impose constraints on the interactions between economic agents in terms of both order flow and prices. This paper provides empirical evidence of order flow persistence for the largest stocks traded on Borsa Istanbul, including their corresponding futures contracts. We also place special attention to the specific differences, in terms of persistence features, that could exist between the spot and futures markets. This relationship is further analysed with respect to the introduction of a new trading system in 2015, which created an entry point for high-frequency traders to trade Turkish stocks, while this same avenue was unavailable to the futures markets. Using a battery of long-memory tests, we show that: (i) across all of the testing procedures that we implemented, the spot markets exhibit higher order flow persistence than the futures markets; (ii) order flow persistence is found to increase substantially more in stocks rather than futures contracts after the introduction of high-frequency trading in the stock markets; and (iii) herding and order-splitting are both found to be responsible for these differing order flow persistence effects.