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Transaction Costs and Market Quality: Open Outcry Versus Electronic Trading

2001; Wiley; Volume: 21; Issue: 8 Linguagem: Inglês

10.1002/fut.1802

1096-9934

Yiuman Tse, Tatyana Zabotina,

Complex Systems and Time Series Analysis

Abstract On May 10, 1999, the London International Financial Futures and Options Exchange (LIFFE) transferred trading in the Financial Times Stock Exchange (FTSE) 100 Index futures contracts from outcry to LIFFE CONNECT, its electronic trading system. We find lower spreads in the electronic market after the transition. However, the open outcry mechanism has higher market quality (or smaller variance of the pricing error) on the basis of Hasbrouck's (1993) model. Furthermore, employing the Hasbrouck (1991) model, we show that trades in the open outcry market have higher information content. Inventory control considerations also affect the electronic market more than the open outcry market. The overall results suggest that electronic trading should complement, but not replace, open outcry in futures markets. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21: 713–735, 2001