The Impact of Derivatives Regulations on the Liquidity T Pricing Efficiency of ETD

A free white paper by The Institute for Financial Markets

This academic peer-reviewed paper looks at the impact of derivatives regulation on liquidity and mispricing of US derivatives markets. Research finds that measured liquidity does fall for US financial futures and options but rises for foreign exchange futures and options subsequent to the introduction of the Treasury guidelines for OTC trading. The authors also find that the efficiency of the US exchange traded futures markets has improved, as reflected by a reduction in mispricing in the S&P futures contracts; some improvement in pricing efficiency is also shown for nearby Eurodollar futures contracts. These results are consistent with an increase of arbitrage by traders on the exchange traded markets, as opposed to the OTC markets, in contrast to the “noise” model.

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