Pricing seats as barrier options. Implications for the futures markets

Trading by locals in futures markets can be implemented through the ownership of one or more "seats". Seats can be freely traded among market-makers. This paper presents a seat's Valuation model where the seat's assignment price is defined as the price of a European down and out call option written on the end of period local's gross profits earned from the seat-related futures trading, having trading operating costs as the stochastic exercise price. In this way the seat has a subjective instead of a market price. In our model the seat's value is an increasing function of the local's quality, which is signalled by the bid-ask spread quoted by the seat's owner for his/her current futures trading. The signalling mechanism will be shown to have relevant consequences on the structure of the futures market in terms of market efficiency, competitiveness and growth.