Time Pro-Rata Matching: Evidence of a Change in LIFFE STIR Futures

Journal of Futures Markets, Vol. 35(6), p. 522–541, doi:10.1002/fut.21708, June 2015

35 Pages Posted: 5 Oct 2016 Last revised: 7 Oct 2016

See all articles by Angelo Aspris

Angelo Aspris

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

Sean Foley

University of Sydney Business School

Drew Harris

University of New South Wales (UNSW)

Peter O'Neill

Financial Conduct Authority

Date Written: June 1, 2015

Abstract

Matching algorithms are important for well-functioning financial markets. This paper examines the 2007 change by LIFFE, to move from pure pro-rata to time pro-rata allocation for the Euribor, Short Sterling, and Euroswiss futures contracts. We show that the removal of pure pro-rata matching reduces market depth but suggest that this outcome improves execution quality for market participants. Our results are consistent with suggestions in the literature that the former regime creates incentives for traders to “drown” the order book with large orders and that the addition of a time element to this algorithm alters their behavior. We provide evidence that traders increase the amount of order splitting in the new framework, consistent with local optimizing, but argue that this may hinder overall market efficiency.

Keywords: Futures, LIFFE, Market Microstructure, Pro-Rata, Price-Time Priority

JEL Classification: G13, G14

Suggested Citation

Aspris, Angelo and Foley, Sean and Harris, Drew and O'Neill, Peter, Time Pro-Rata Matching: Evidence of a Change in LIFFE STIR Futures (June 1, 2015). Journal of Futures Markets, Vol. 35(6), p. 522–541, doi:10.1002/fut.21708, June 2015 . Available at SSRN: https://ssrn.com/abstract=2847089

Angelo Aspris (Contact Author)

University of Sydney - Discipline of Finance ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

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

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

Sean Foley

University of Sydney Business School ( email )

Sydney
Australia

Drew Harris

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Peter O'Neill

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

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