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Liquidity costs: Screen‐based trading versus open outcry
Author(s) -
Ulibarri Carlos A.,
Schatzberg John
Publication year - 2003
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2003.07.003
Subject(s) - market liquidity , electronic trading , open outcry , futures contract , tick size , business , monetary economics , high frequency trading , dark liquidity , trading turret , economics , futures market , financial economics , algorithmic trading , econometrics , alternative trading system , finance
Abstract The results reported in this paper challenge the popular belief that screen‐based trading offered lower liquidity costs than the open‐outcry approach during its first year of side‐by‐side operation in the U.S. financial derivatives market. Using time and sales data from the Chicago Board of Trade (CBOT) market profile data series, effective bid–ask spreads are estimated on the basis of daily and intraday measures of the Thompson–Waller and Smith–Whaley estimators. We find liquidity costs on the screen‐based system vary with time and the level of floor trading activity. In particular, a one‐tick market is observed just before the opening of the Chicago trading floor (6:30 to 7:30 am). However, subsequent intraday spreads exhibit the familiar “reverse J‐shaped pattern”—highest following the opening of floor trading, declining until afternoon, and then increasing until close. Meanwhile, daily spread estimates average almost a quarter‐tick higher on the screen‐based market relative to the one‐tick spread commonly associated with open outcry. This relationship remained robust across sample time‐series and conservative price‐change specifications. Since the study was conducted, electronic trading has become the predominant exchange medium for financial derivatives at the CBOT, following the example set in Europe's traditional futures exchanges, e.g. France's Matif, Germany's Deutsche Bourse and the U.K.'s Liffe.