How much do locals contribute to the price discovery process?

Abstract

This paper studies the relative contribution of floor brokers and local floor members (locals) towards the price discovery process. Using detailed Share Price Index (SPI) futures contract data from the Sydney Futures Exchange (SFE), we construct 1- and 5-min series of volume weighted average prices for both floor brokers and locals. Estimates of Gonzalo and Granger [J. Bus. Econ. Stat. 13 (1995) 27] plus Hasbrouck [J. Finance 50 (1995) 1175] information shares reveal that trades initiated by locals account for approximately one-third of all price discovery within the market. Also, it is found that the locals' share of price discovery is higher than their share of trading activity. However, when there is high volatility or when observation intervals are lengthened, locals' contribution to price discovery declines. We conclude that although floor brokers are the main contributors, locals do play a significant role within the price discovery process.