Informational role of market makers: The case of exchange traded CFDs

This study examines the informational role of market makers in the S&P/ASX 200 CFD (CFD 200) market relative to other alternative index markets. The results reveal that the market for the SPI 200 Index Futures (SPI 200) plays a dominant role in the process of price discovery in the S&P/ASX 200 Index market. The remaining contributions to price discovery are shared between the CFD 200 and SPDR ETF markets; between the two markets, the contribution of the CFD 200 market is substantially greater than that of the SPDR ETF market. This study also provides evidence that innovation correlations between the CFD 200 and SPI 200 markets are considerably larger than those between index-linked instruments reported in prior studies. The results suggest that the CFD 200 market makers mechanically set quotes (“autoquoting”), using limit order prices for the SPI 200 contracts as benchmark quotes.