Price efficiency in futures and spot trading: The role of information technology

During the last years information technology has had a profound impact on financial markets. The speed of trading and the amount of available information has increased substantially. Nearly all exchanges have upgraded their trading systems to meet the demand of investors and enhance their competitive position. However, the impact on liquidity and price efficiency remains unclear. In this paper we present an event study to examine the effects of an infrastructure change at the Deutsche Börse in Germany. On April 23, 2007, Deutsche Börse released an upgraded version of their electronic trading system Xetra. We study the impact that this upgrade had on the efficiency of prices, measured as the pricing gaps between the observed futures prices and their theoretical values based on the underlying cash market. Our results suggest that the system upgrade reduced the pricing gapand thus improved price efficiency.