The Bid-Ask Spread of the Ftse-100 Futures Contract
Posted: 21 Sep 1998
Date Written: August 10, 1998
Half point quotes and consequently half-point spreads are virtually non-existent in FTSE-100 futures trading. This is surprising since in 1994 Christie and Schultz published a series of papers documenting tacit collusion among NASDAQ market makers. Subsequent to the publication of their article the peculiarity ceased to exist for NASDAQ stocks but apparently not in other asset markets. The FTSE-100 futures contract is traded on the London International Financial Futures Exchange (LIFFE) throughout the day in open outcry pit trading and in after hours trading through an electronic market clearing system called Automated Pit Trading (APT). Pit trading is the prototype of a competitive market that is designed to ensure minimal bid-ask spreads.
In a second part this paper estimates the total economic costs associated with the operation of the FTSE-100 futures trading pit. These costs arise from the existence of the bid-ask spread and are borne by all market participants who have a real demand for the futures contract and initiate trades. The spread costs are in addition to common transaction costs and fees paid directly to brokers and traders. The spreads in APT trading are found to be on average 50% higher than during pit trading, which may help explain the APT low trading volume relative to the volume transacted during pit trading. A spread decomposition shows that 80 percent of the spread can be attributed to time invariant spread components while only the remaining 20% are transient components related to price risk over the expected holding period of the scalper.
JEL Classification: G14, G15, F39
Suggested Citation: Suggested Citation