The Impact of Electronic Trading on Liquidity

32 Pages Posted: 19 May 2001

See all articles by Alex Frino

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Amelia M. Hill

The University of Sydney - Discipline of Finance

Date Written: May 2001

Abstract

During 1999 and 2000, three major futures exchanges transferred trading in stock index futures from open outcry to electronic markets: the London International Financial Futures and Options Exchange (LIFFE); Sydney Futures Exchange (SFE); and Hong Kong Futures Exchange (HKFE). These changes in trading systems provide unique natural experiments to assess the relative liquidity of open outcry and electronic markets. After controlling for price volatility and trading volume, bid-ask spreads are found to be lower under the electronic trading regimes implemented by all three exchanges, with significantly lower bid-ask spreads recorded for the electronic trading systems of the SFE and HKFE. This provides some evidence that electronic trading can facilitate higher levels of liquidity relative to floor traded markets. Evidence is found, however, that bid-ask spreads become wider in response to higher price volatility under electronic trading, relative to floor trading. This indicates that the performance of electronic trading systems deteriorates during periods of higher price volatility.

Keywords: Electronic trading, screen trading, automation, futures markets, liquidity

JEL Classification: G10

Suggested Citation

Frino, Alex and Hill, Amelia M., The Impact of Electronic Trading on Liquidity (May 2001). Available at SSRN: https://ssrn.com/abstract=269419 or http://dx.doi.org/10.2139/ssrn.269419

Alex Frino

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Amelia M. Hill (Contact Author)

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9299 1807 (Phone)
+61 2 9299 1830 (Fax)

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