TY - JOUR T1 - The Transaction Costs of Risk Management vs. Speculation in an Electronic Trading Environment JF - The Journal of Trading SP - 82 LP - 101 DO - 10.3905/jot.2007.694832 VL - 2 IS - 4 AU - Lorne N. Switzer AU - Haibo Fan Y1 - 2007/09/30 UR - https://pm-research.com/content/2/4/82.abstract N2 - Using a unique and rich database that includes the identity of market participants from a fully automated derivatives market, this article provides new measures of the actual agency costs of trading that capture differences in costs between principals as well as transactions that are conducted for risk management as opposed to speculative purposes. The analysis is performed for two of the most liquid interest rate and equity futures contracts on the Montreal Exchange: the BAX, and the SXF. Using transaction records by milliseconds for the BAX from January 2004 to March 2004 and from January 2005 to March 2006 as well as transaction records of the SXF from January 2005 to May 2006, as well as the exchange FIFO protocol for trading, we identify trading costs for several categories of market participants. The trading costs on the BAX are much less than the minimum contract tick value and are similar to the costs estimated for Eurodollar futures on the CME; however, transaction costs on SXF are much higher than the contract's minimum tick value and exceed those estimated for the CME S&P 500 index futures contracts. Transaction costs and measures of trading activity do not appear to be correlated.TOPICS: Risk management, exchanges/markets/clearinghouses ER -