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Spreads, information flows and transparency across trading systems

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Author Info

  • Paul Kofman
  • James T. Moser

Abstract

This paper analyses the relative merits of an automated versus an open outcry trading system for a derivatives contract which is traded simultaneously at two competing exchanges. The only characterizing difference between these exchanges is the mode of operation. The domestic exchange (listing the underlying asset) operates by automated trading, the foreign exchange uses open outcry. Investigations are made to determine whether this operational competition supports a trading system segmentation hypothesis. First, quote setting is investigated to determine whether or not it is related to the transparency of the trading system. Second, analysis is carried out to determine whether the transparency of the trading system influences the lead/lag relationship in returns and volatility between the two markets. Both hypotheses are empirically tested for the Bund futures contract as it is traded in London (LIFFE) and Frankfurt (DTB).

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Issues in Financial Regulation with number 95-1.

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Date of creation: 1995
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Handle: RePEc:fip:fedhfi:95-1

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Keywords: Futures ; International finance;

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Cited by:
  1. Martens, Martin, 1998. "Price discovery in high and low volatility periods: open outcry versus electronic trading," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 8(3-4), pages 243-260, December.
  2. Theissen, Erik, 2003. "Organized equity markets in Germany," CFS Working Paper Series 2003/17, Center for Financial Studies (CFS).
  3. Frino, Alex & McInish, Thomas H. & Toner, Martin, 1998. "The liquidity of automated exchanges: new evidence from German Bund futures," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 8(3-4), pages 225-241, December.
  4. Asani Sarkar & Michelle Tozzi, 1998. "Electronic trading on futures exchanges," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 4(Jan).
  5. Laurence Lescourret & Thierry Foucault, 2001. "Information Sharing Liquidity and Transaction Costs in Floor-Based Trading Systems," Working Papers, Centre de Recherche en Economie et Statistique 2001-18, Centre de Recherche en Economie et Statistique.
  6. Coppejans, Mark & Domowitz, Ian, 1999. "Pricing behavior in an off-hours computerized market," Journal of Empirical Finance, Elsevier, Elsevier, vol. 6(5), pages 583-607, December.
  7. Ulibarri, Carlos A. & Schatzberg, John, 2003. "Liquidity costs: Screen-based trading versus open outcry," Review of Financial Economics, Elsevier, Elsevier, vol. 12(4), pages 381-396.
  8. Francis Breedon & Allison Holland, 1998. "Electronic versus open outcry markets: The case of the Bund futures contract," Bank of England working papers 76, Bank of England.
  9. Chan, Howard Wei-Hong & Pinder, Sean M., 2000. "The value of liquidity: Evidence from the derivatives market," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 8(3-4), pages 483-503, July.
  10. Brailsford, Timothy J. & Frino, Alex & Hodgson, Allan & West, Andrew, 1999. "Stock market automation and the transmission of information between spot and futures markets," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 9(3-4), pages 247-264, November.
  11. Theissen, Erik, 2002. "Price discovery in floor and screen trading systems," Journal of Empirical Finance, Elsevier, Elsevier, vol. 9(4), pages 455-474, November.
  12. Chung, Huimin & Sheu, Her-Jiun & Hsu, Shufang, 2010. "Trading platform, market volatility and pricing efficiency in the floor-traded and E-mini index futures markets," International Review of Economics & Finance, Elsevier, Elsevier, vol. 19(4), pages 742-754, October.
  13. Pinder, Sean, 2003. "An empirical examination of the impact of market microstructure changes on the determinants of option bid-ask spreads," International Review of Financial Analysis, Elsevier, Elsevier, vol. 12(5), pages 563-577.

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