The impact of automation on the cost of transacting in futures markets

The global trend towards automation in futures markets is in part driven by competitive pressure amongst exchanges to reduce transaction costs. This study examines the impact of electronic trading on the cost of trade execution by examining the transition from floor to electronic trading on the Sydney Futures Exchange. Electronic trading coincides with a reduction in brokerage commission fees of 5% and a reduction in bid-ask spreads of 3.8% for the Share Price Index futures contract. This study also provides new evidence on the magnitude of transaction costs in futures markets. The cost of trading in the futures markets remains lower than those prevalent in the equities markets. Commission fees average 0.003% of transaction value and are up to 120 times smaller than the magnitude of brokerage fees charged in the equities markets. Bidask spreads average 0.042% of transaction value and are more than 18 times smaller than those documented for the equities markets.