The impact of a pro-rata algorithm on liquidity: Evidence from the NYSE LIFFE

This study investigates the impact of introducing a pure pro‐rata algorithm on the liquidity of the market for Euribor futures contracts on NYSE LIFFE. Results indicate that the Euribor market experiences deterioration in liquidity: (1) both best and total depth fall and (2) quoted spreads widen aft...

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Published inThe journal of futures markets Vol. 32; no. 7; pp. 660 - 682
Main Authors Lepone, Andrew, Yang, Jin Young
Format Journal Article
LanguageEnglish
Published Hoboken Blackwell Publishing Ltd 01.07.2012
Wiley-Blackwell
Wiley Periodicals Inc
Subjects
Algorithms
Deterioration
Futures market
Impact analysis
Investment analysis personal finance
Liquidity
Management science
Market regulation
Marketing
NYSE LIFFE
Securities trading volume
Structural change
Studies
Trade volume
U.S.A
United States > US
Online AccessGet full text
ISSN0270-7314
1096-9934
DOI10.1002/fut.20536

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Summary:This study investigates the impact of introducing a pure pro‐rata algorithm on the liquidity of the market for Euribor futures contracts on NYSE LIFFE. Results indicate that the Euribor market experiences deterioration in liquidity: (1) both best and total depth fall and (2) quoted spreads widen after the structural change. Results also reveal that the Euribor market becomes more active after the event; both trading volume and trade frequency increase substantially after the event. Finally, after the transition, liquidity demanders are more likely to submit smaller market orders. The reduction in depth and increase in quoted spreads suggest that liquidity demanders incur higher trade execution costs after the transition. In contrast, the transition is beneficial for the exchange since trading volume is higher under the new regime. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:660–682, 2012
Bibliography:Sydney Futures Exchange under Corporations Regulation
ArticleID:FUT20536
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This research was funded by the Sydney Futures Exchange under Corporations Regulation 7.5.88(2). The authors thank workshop participants at the Business Development Group of the Australian Securities Exchange, and the comments of an anonymous referee.
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ISSN:0270-7314
1096-9934
DOI:10.1002/fut.20536