Optimal Innovation of Futures Contracts

This paper provides an expression for the revenue maximizing and open interest maximizing choice of futures contracts by exchanges in incomplete markets under uncertainty, with quadratic Von Neumann-Morgenstern preferences and proportional transactions costs. We characterize the set of Nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts. The optimal monopolistic contract design is shown to be Pareto optimal, while an example shows the failure of Pareto optimality for a set of contracts forming a Nash equilibrium of the multi-exchange design game. Likewise, in a monopolistic multi-period setting, an example shows failure of Pareto optimality, given an incentive for the exchange to induce turnover.