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Electronic versus open outcry markets: The case of the Bund futures contract

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Author Info
Francis Breedon
Allison Holland

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Abstract

The Bund (10 year German Government Bond) futures contract is the most actively traded bond contract in Europe; it is traded in both London (LIFFE) and Frankfurt (DTB) on open outcry and electronic trading platforms respectively. In an attempt to reconcile the conflicting results of earlier studies this paper evalutes the relative liquidity and price discovery roles of these two markets using data from 1995 Q2. The paper finds that this conflict is largely a product of the price data used. Using both transactions prices and quotes data (on a minute by minute basis), variable transaction costs, i.e. spreads, are found to be similar on both markets. There is some evidence to suggest that the order processing component of the spread is larger on LIFFE, but that the compensation required for adverse selection risk is greater on the DTB. Also, the contribution to price formation of each market is found to be similar; there is no clear leader/follower relationship. The main differences between the two markets are the larger trade size on the open outcry market and a tendency for trading to move toward the open outcry market during volatile periods.

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Paper provided by Bank of England in its series Bank of England working papers with number 76.

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Handle: RePEc:boe:boeewp:76

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July. [Downloadable!] (restricted)
  2. Hasbrouck, Joel, 1995. " One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-99, September. [Downloadable!] (restricted)
  3. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(4), pages 623-56. [Downloadable!] (restricted)
  4. Roll, Richard, 1984. " A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-39, September. [Downloadable!] (restricted)
  5. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June. [Downloadable!] (restricted)
  6. Paul Kofman & James T. Moser, 1995. "Spreads, information flows and transparency across trading systems," Working Paper Series, Issues in Financial Regulation 95-1, Federal Reserve Bank of Chicago.
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  7. Francis Breedon, . "Why do the LIFFE and DTB bund futures contracts trade at different prices?," Bank of England working papers 57, Bank of England.
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  1. Cantillon, Estelle & Yin, Pai-Ling, 2008. "Competition between Exchanges: Lessons from the Battle of the Bund," CEPR Discussion Papers 6923, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Asani Sarkar & Michelle Tozzi, 1998. "Electronic trading on futures exchanges," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jan. [Downloadable!]
  3. Estelle Cantillon & Pai-Ling Yin, 2007. "How and when do markets tip? Lessons from the Battle of the Bund," Working Paper Series 766, European Central Bank. [Downloadable!]
  4. Erik Theissen, 2001. "Price Discovery in Floor and Screen Trading Systems," Bonn Econ Discussion Papers bgse35_2001, University of Bonn, Germany. [Downloadable!]
    Other versions:
  5. Erik Theissen, 2003. "Organized Equity Markets in Germany," CFS Working Paper Series 2003/17, Center for Financial Studies. [Downloadable!]
  6. Ulibarri, Carlos A., 2004. "Introducing contemporaneous open-outcry and e-trading at the Chicago Board of Trade," MPRA Paper 14821, University Library of Munich, Germany. [Downloadable!]
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