Revisiting the determinants of futures contracts success: the role of market participants

Abstract

AbstractThe Chicago Mercantile Exchange introduced a futures contract for distillers’ dried grains (DDGs) in early 2010, but the market became inactive only four months after its inception. While many new futures contracts do not develop into high‐volume traders, interest from DDG cash market participants indicated that this contract could be successful. Prompted by the unexpected lack of trading activity in this new futures market, we empirically revisit the question of what factors contribute to a futures contract's success and extend the literature by investigating the roles of market participants and the significance of supporting futures markets. Estimation results indicate that the market participant type—hedger or speculator—affects futures contract trade volume. More importantly, we find that the viability of new futures contracts for commodities that are jointly produced with other commodities is impacted by hedgers’ trade volume of the related futures contract. These results provide important additions into the portfolio of indicators used by commodity exchanges to more cost‐effectively evaluate new futures contract products.