This study examines key factors that influence the success of exchange-traded futures contracts of Asian futures markets. The results show that successful futures contracts benefit from a large and volatile spot market. In addition, a smaller contract size has a positive effect on the futures trading volume, which in turn contributes to the success of the futures contract. For specific institutional factors, the choice of the trading platform and the relative size of exchanges are both important to the success of futures contracts.
Futures contracts are one of the most actively traded derivatives used to hedge risk. In the past decade, there has been an exponential growth in option and futures trading volume. In 2008, nearly 17.7 billion contracts of both futures and options were traded throughout the world. To ensure survival, each futures exchange attempts to keep searching for new contracts that will generate sufficient interest to sustain a profitable level of trading volume for the exchange. However, the risk of not being successful is considerable in listing futures contracts for the exchange (Carlton, 1984, Tashjian, 1995 and Tashjian and McConnell, 1989).
For most futures exchanges, it is quite difficult to predict the success or failure of new futures contracts. Silber (1981) estimates that between two-thirds and three-quarters of new contracts fail to attract and sustain a profitable level of trading volume. Carlton (1984) analyzes the longevity and competition of US futures contracts between 1921 and 1983 and finds that most futures innovations fail within 10 years of their introduction. Similarly, Kolb (1991) finds that only three of every ten new futures contracts end up as a profitable product on the exchange, suggesting a high failure rate of futures innovations. Therefore, when developing new futures contracts, it is important to understand why futures markets succeed or fail. Countries considering the development of a futures market must be aware of the conditions required for the success of a futures market.
In financial literature, much attention has been paid to theories that explain the success or failure of futures contracts. In previous research, the success of futures contracts has been explained by some well-known observable variables, such as cash market size and cash market price variability (Black, 1986, Nothaft et al., 1995 and Silber, 1981). Another strain of literature explaining the success or failure of futures focuses on contract design (Black, 1986 and Duffie and Jackson, 1989Lien and Chan, 2002, Lien and Tse, 2006 and Tashjian, 1995). Pennings (1998) argues that the specific structure, i.e., the promotion and distribution element of the marketing mix of futures exchanges is also a key factor that affects the success or failure of futures contracts.
In the past two decades, East Asia featured sustained and rapid growth, with impressive structural change and substantial improvement in living standards (Gamra, 2009). Unlike Brorsen and Fofana (2001) who seek to identify factors that contribute significantly to the success or failure of agricultural commodities futures contracts, this study aims at identifying key factors that influence significantly the success of financial futures contracts among the key East Asian futures exchanges that offer similar futures and options contracts. Specifically, we examine the factors that influence the success or failure of futures contracts and explore the effect of the specific structure of futures exchanges on the success or failure of ten futures contracts for six futures exchanges in five East Asian countries, including Taiwan Futures Exchange (in Taiwan), Singapore Exchange (in Singapore), Hong Kong Futures Exchange (in Hong Kong), Korean Options and Futures Exchange (in Korea), Osaka Securities Exchange and Tokyo Stock Exchange (in Japan).
The determinants of futures contract success and optimal futures contract design are important considerations for futures exchanges, as well as for traders and hedgers of futures contracts. The study identifies some key factors that contribute significantly to the success of ten futures contracts traded on the six key Asian futures exchanges in five Asian countries. Previous literature also suggests that the structures of the exchanges are also key factors that affect the success or failure of futures
contracts, since futures exchanges compete with one another to list futures and futures options contracts that have the potential to become actively traded.
