The lifecycle of exchange-traded derivatives

Abstract

THIS CHAPTER DOES NOT REFLECT THE OPINIONS OF THE CFTC Using a comprehensive dataset covering most derivatives trades reported to US exchanges since 1954, we present distributional estimates of the rate at which derivative trading volumes rise and fall. Our results suggest that the lifecycle of cleared derivatives changed fundamentally in the 2000's. In that decade, derivatives with low trading volumes moved to modest volumes with increased probability. Prior to that, low volume contracts were more likely to remain stuck at low volumes or be delisted altogether. This additional resilience from low levels of trading meant that the expected trading volume for a new cleared derivative after ten years of trading actually grew between the 1990's and 2000's, despite the fact that a larger percentage of contracts traded at low volume in any given year. These findings suggest that trends in futures markets growth first noted in Silber [1981] and Carlton [1984] and subsequently cited widely in literature on derivatives innovation are less relevant than in the past. We also discuss the relative influence of exchange, product type, and decade of trading on volume patterns. We find that trading volumes varied more decade to decade than from exchange to exchange or product type to product type. Looking in detail at trading on the New York Mercantile Exchange, an exchange that shifted abruptly to electronic trading, we find evidence that the widespread adoption of electronic trading was the driver behind the shift in the lifecycle of derivatives across US exchanges in the last decade. 1 G. Gorton and K.G. Rouwenhorst. Facts and fantasies about commodity futures. Technical report, National Bureau of Economic Research, 2004 2 M.W. Hung, B.H. Lin, Y.C. Huang, and J.H. Chou. Determinants of futures contract success: Empirical examinations for the asian futures markets. International Review of Economics & Finance, 20 (3):452-458, 2011 technological innovation and organizational changes at derivatives the lifecycle of exchange-traded derivatives 2 exchanges between 1990 and 2010 altered the economics of derivatives trading 3. 3 M. Gorham and N. Singh. Electronic Exchanges: The Global Transformation From Pits to Bits. Elsevier Science, 2009 Changes in derivatives markets over time Concentration of trading volume over time the lifecycle of exchange-traded derivatives 8