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

by Laura Wurm (Queen’s University Belfast). This blog is based on the author’s presentation to the Economic History Society’s annual conference, 2021 (session NRIID)

Ever since the emergence of futures markets, the effect of futures trading on spot price volatility has been subject to debate. While the populist discourse affirms the price-disturbing consequences of futures trading, a big part of the economics literature claims that futures markets dampen spot price volatility. In this paper, I test the effects of futures trading on the cash market by looking at what happens if it no longer exists. To do so, I go back to the early twentieth century, when futures trading in the Viennese grain market was, unlike in other cities at the time, banned permanently, with Vienna remaining without a futures market in grain until today. The uniqueness of this ban makes it an ideal experiment to test the effect of futures trading and its abolishment on spot price volatility. I test two hypotheses:

(I) the ban of futures trading in the Viennese market increased the volatility of spot prices, as the risk-allocation and information transmission function of futures to cash markets was no longer maintained and,

(II) the ban reduced information flows from futures to cash markets.

I use daily spot and futures prices from the Viennese Agricultural Product Exchange’s archival quotation lists and newspapers of the time. Prices from Budapest, obtained from the newspapers Pester Lloyd and Ostdeutsche Rundschau, are used as a control. The Vienna and Budapest markets provide a unique setup, because they were similarly organised, offered the same types of grain, and were the only two locations in the Austro-Hungarian Empire with a futures trade in grain. The ban only affected the Viennese market, while Budapest continued to operate with an intact futures market, making it an ideal control. As information is likely to flow in from the Budapest futures market after the ban, possibly dampening the effect of the prohibition on spot price volatility in Vienna, I also test for Granger causality between the two cities.

Spot price volatility in Vienna is found to increase after the ban, with a higher intra-day variation of spot prices. This supports the view that futures trading makes cash markets more efficient and increases the speed at which information is incorporated into spot prices (see Cox, 1976; Garbade and Silber, 1986; Fama and French, 1987; Ross, 1989; Gibson and Schwartz 1990; Bessembinder et al., 1995). In addition, information flows between the futures and spot markets of Vienna and Budapest are found to have existed prior to the ban, which links to futures-cash information transmission and the close ties between the two cities. After the ban in Vienna, Budapest futures prices with three to six months maturity significantly continue to  Granger-cause Viennese spot prices.

To contact the author:  lwurm01@qub.ac.uk