System latency in linked spot and futures markets

Abstract

We examine the lead-lag effect between DAX index and DAX index futures under asymmetric latency in the exchange infrastructure. Using 1-min high frequency observations in 2006-2007, it is found that the market integration between stock index and stock index futures has significantly grown compared to prior research. While the degree of price discovery in the futures market decreased both markets react mostly contemporaneously towards new information. An event story of latency reduction on Xetra reveals that exchange latency is one important factor explaining this development. We find evidence that smaller asymmetric round-trip-times between Xetra and Eurex lead to a higher degree of market integration.

Publication
15th Americas Conference on Information Systems 2009, AMCIS 2009, (9), pp. 6021-6031