Strangling Speculation: The Effects of the 1903 Viennese Futures Trading Ban

By Laura Wurm (Queen’s University Belfast)

This blog is part of a series of New Researcher blogs.

—

Ever since the emergence of futures markets and speculation, the effects of futures trading on spot price volatility have been subject to intense debate. While the populist discourse affirms the adverse and price-disturbing consequences of futures trading, the work of scholars stresses the risk allocation and information transmission function of futures towards spot markets, essential for pricing cash transactions. My research tests whether these volatility-lowering effects of futures trading towards the cash market hold true by assuming the opposite: what happens if futures trading no longer exists?

To do so, I go back to the early 20^th century, when futures trading in the Viennese grain market was, unlike at other trade locations at the time, such as Germany, England, or Texas, banned permanently. The 1903 parliament-enforced prohibition of futures trading was the consequence of an aversion against speculators, who were blamed for “never having held actual grain in their hands”. Putting an end to the vibrant futures market of the Agricultural Products Exchange, the city’s gathering place for farmers, millers, large-scale customers, and speculators, was thought to be the last resort to curb undue speculation. Up to the present day, futures trading has not been resumed. The uniqueness of this ban makes it an ideally suited natural experiment to test the effects of futures trading and its abolishment on spot price volatility. Prices from the Budapest Stock and Commodity Exchange, which was not affected by the ban, are used as a synthetic control. The Budapest market, as part of the Austro-Hungarian Empire, operated under similar legal-economic and geographic conditions, and was, in addition to Vienna, the only Austro-Hungarian market offering a trade in futures. This makes Budapest an ideally suited control.

My project examines the information transmission function of futures to spot markets and finds a heightened spot price volatility in Vienna and a lower accuracy in pricing cash transactions after futures trading was banned. The intra-day variation of spot prices increased after the ban. Without futures trading, the Viennese market lacked pricing accuracy and efficiency. The effect on volatility holds true when using a commodity traded exclusively on the Viennese spot market as a control. In addition, assessing Granger causality, information flows between the futures and spot markets of the two cities are found to have existed prior to the ban, which links to the information transmission function of futures towards cash markets and the close ties between the two markets. After futures trading was prohibited in Vienna, Budapest futures prices with 3-6 months maturity continued to significantly Granger-cause Viennese spot prices.

—

Laura Wurm

lwurm01@qub.ac.uk