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Spreads, information flows and transparency across trading systems

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  • Paul Kofman
  • James 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).

Suggested Citation

  • 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.
  • Handle: RePEc:taf:apfiec:v:7:y:1997:i:3:p:281-294
    DOI: 10.1080/096031097333646
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    Cited by:

    1. Patricia Chelley-Steeley, 2005. "Noise and the Trading Mechanism: the Case of SETS," European Financial Management, European Financial Management Association, vol. 11(3), pages 387-424.
    2. Theissen, Erik, 2002. "Price discovery in floor and screen trading systems," Journal of Empirical Finance, Elsevier, vol. 9(4), pages 455-474, November.
    3. Theissen, Erik, 2002. "Price discovery in floor and screen trading systems," Journal of Empirical Finance, Elsevier, vol. 9(4), pages 455-474, November.
    4. Angel Pardo & Roberto Pascual, 2012. "On the hidden side of liquidity," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 949-967, November.
    5. 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).
    6. 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, vol. 8(3-4), pages 225-241, December.
    7. Craig Pirrong, 1996. "Market liquidity and depth on computerized and open outcry trading systems: A comparison of DTB and LIFFE bund contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(5), pages 519-543, August.
    8. 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, vol. 19(4), pages 742-754, October.
    9. Ulibarri, Carlos A. & Schatzberg, John, 2003. "Liquidity costs: Screen-based trading versus open outcry," Review of Financial Economics, Elsevier, vol. 12(4), pages 381-396.
    10. 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, vol. 8(3-4), pages 243-260, December.
    11. 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, vol. 9(3-4), pages 247-264, November.
    12. Coppejans, Mark & Domowitz, Ian, 1999. "Pricing behavior in an off-hours computerized market," Journal of Empirical Finance, Elsevier, vol. 6(5), pages 583-607, December.
    13. Theissen, Erik, 2003. "Organized equity markets in Germany," CFS Working Paper Series 2003/17, Center for Financial Studies (CFS).
    14. FOUCAULT, Thierry & LESCOURRET, Laurence, 2001. "Information sharing, liquidity and transaction costs in floor-based trading systems," Les Cahiers de Recherche 742, HEC Paris.
    15. Philip Hans Franses & Reinoud leperen & Paul Kofman & Martin Martens & Bert Menkveld, 1997. "Volatility Transmission And Patterns In Bund Futures," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(4), pages 459-482, December.
    16. Chan, Howard Wei-Hong & Pinder, Sean M., 2000. "The value of liquidity: Evidence from the derivatives market," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 483-503, July.
    17. 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, vol. 12(5), pages 563-577.
    18. 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.

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