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

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  • Francis Breedon
  • Allison Holland

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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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1998/wp76.pdf
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Bibliographic Info

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

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Date of creation: Jan 1998
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Handle: RePEc:boe:boeewp:76

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  1. Paul Kofman & James Moser, 1997. "Spreads, information flows and transparency across trading systems," Applied Financial Economics, Taylor & Francis Journals, vol. 7(3), pages 281-294.
  2. Francis Breedon, 1996. "Why do the LIFFE and DTB bund futures contracts trade at different prices?," Bank of England working papers 57, Bank of England.
  3. Thompson, S. & Waller, M.L., 1988. "Determinants Of Liquidity Costs In Commodity Furures Markets," Papers 172, Columbia - Center for Futures Markets.
  4. 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.
  5. 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.
  6. 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.
  7. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 623-56.
  8. 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.
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Citations

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Cited by:
  1. 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.
  2. Erik Theissen, 2001. "Price Discovery in Floor and Screen Trading Systems," Bonn Econ Discussion Papers bgse35_2001, University of Bonn, Germany.
  3. Theissen, Erik, 2003. "Organized equity markets in Germany," CFS Working Paper Series 2003/17, Center for Financial Studies (CFS).
  4. Estelle Cantillon & Pai-Ling Yin & Sloan Mit, . "Competition between Exchanges - Lessons from the Battle of the Bund," ULB Institutional Repository 2013/151702, ULB -- Universite Libre de Bruxelles.
  5. Helen Allen & John Hawkins & Setsuya Sato, 2001. "Electronic trading and its implications for financial systems," BIS Papers chapters, in: Bank for International Settlements (ed.), Electronic finance: a new perspective and challenges, volume 7, pages 30-52 Bank for International Settlements.
  6. Jun Muranaga & Tokiko Shimizu, 1999. "Market Microstructure and Market Liquidity," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-28 Bank for International Settlements.
  7. Cantillon, Estelle & Yin, Pai-Ling, 2007. "How and when do markets tip? Lessons from the Battle of the Bund," Working Paper Series 0766, European Central Bank.
  8. Asani Sarkar & Michelle Tozzi, 1998. "Electronic trading on futures exchanges," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 4(Jan).

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