Liquidity and Trading Activity on a New Futures Market : The Thailand Futures Exchange (TFEX)

In April, 2006, the newly established Thailand Futures Exchange (TFEX) launched the SET 50 index futures contract as its first traded product. The launch provides this study with a unique opportunity to investigate the development of liquidity and trading activity on an emerging futures market. The joint dynamics of different dimensions of liquidity and trading activity is analyzed over the exchange's first 3.5 years of operation using a vector autoregressive (VAR) framework. Results show a considerable increase in liquidity, with larger order book depth, and an increase in trading activity during the futures market's infant years. The VAR analysis reveals evidence of significant bi-directional causation between; (i) the two dimensions of futures market liquidity, the bid-ask spread and order book depth, (ii) futures trading activity and volatility, (iii) futures liquidity (width and depth) and the information flow to the futures market (through trading activity and volatility). Information shocks to volatility affect futures market liquidity, which in turn affect volatility even further. Although shocks are persistent, the effects wear off within a few trading days, indicating that the TFEX is a viable futures market even in its youth