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This paper examines the differences in volume, volatility and liquidity in the underlying market during intervals when futures trade with those in which they do not trade using high frequency proprietary data. The authors find that although the bid-ask spreads decrease, this is not due to a fall in information asymmetries and a fall in the adverse selection costs. They find supporting evidence that the fall in the spread could be due to lower inventory holding costs as a result of lower depth when futures trade. Authors also find volatility to increase when futures trade accompanied by increases in trading volume supporting the scenario that institutional investors take large positions in both derivative and the underlying markets creating price pressures.
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