The Cost of Trade Execution Services in Futures Markets

This paper provides new evidence on the magnitude and determinants of brokerage commissions in futures markets using a sample of brokerage fees charged to transactions on the Sydney Futures Exchange. Commission fees charged on futures trades average 0.002 percent of transaction value. This is up to 120 times smaller than the magnitude of brokerage fees charged in stock markets, and considerably lower than the magnitude of brokerage fees assumed for futures markets in previous research. Consistent with existing studies based on stock markets, commissions charged per contract decrease with order size reflecting economies of scale in the provision of brokerage services in futures markets. Commission rates are positively related to bid-ask spreads and price volatility, which proxy for the probability of execution error costs and execution difficulty, respectively. The identity of the broker is a significant determinant of commissions reflecting different pricing schedules across brokers. Finally, the sample period examined in this study covered the period of transition to electronic trading on the Sydney Futures Exchange. There is strong evidence that the introduction of electronic trading is associated with lower brokerage commissions relative to floor traded markets.