What happens to market quality and price formation

on the cash market once derivatives trading commences?
A: The empirical evidence broadly suggests that market efficiency and liquidity on the
spot market improve once derivatives trading comes about.
Speculators generally prefer implementing their positions using derivatives rather than
using a sequence of trades on the underlying spot market. Hence, access to derivatives
increases the rate of return on information gathering, research and forecasting activities,
and thus serves to spur investments into information gathering and forecasting. This helps
improve market efficiency.
From a market microstructure perspective, derivatives markets may reduce the extent
to which informed speculators are found on the spot market, thus reducing the adverse
selection on the spot market. Derivatives also help reduce the risks faced by liquidity
providers on the spot market, by giving them avenues for hedging. These effects help
improve liquidity on the spot market.
A liquid derivatives market tends to become the focus of speculation and price discovery.
When news breaks, the derivative market reacts first. The information propagates
down to the cash market a short while later, through the activities of arbitrageurs.