The End of an Era: Who Pays the Price when the Livestock Futures Pits Close?

Abstract

This paper evaluates how the closure of the futures pits impacted the execution costs of orders from a specific group of market participants, the customers, in the livestock futures market. Our results indicate that customers, who were users of the live cattle and lean hog pits prior to their closure, experience an increase in the execution cost of their orders. This applies to both the overall execution costs of their orders and the execution costs of their electronic orders. routed to the electronic limit order book. We show that this was due to the loss of the pit, which was providing a cost-efficient execution for customers’ large orders. However, in the case of feeder cattle futures, we do not find any significant change in the corresponding customer execution costs and we attribute this finding to the small number of dealers in the feeder cattle pit, which potentially prohibited cost-efficient execution in the feeder cattle pit, even before it officially closed.

Keywords: pit trading, electronic trading, livestock futures, execution costs, customer orders

JEL Classification: G10, G14