Spreads, Information Flows and Transparency Across Trading Systems Federal Reserve Bank of Chicago, Issues in Financial Regulation
Posted: 15 Sep 1999
This paper analyzes the dynamics of price formation for a strictly identical derivatives contract which is traded simultaneously at two competing exchanges. The domestic exchange is situated in the country that issues the underlying instrument. The foreign exchange offers a large international capital centre with many diversificationpossibilities. In addition, the exchanges are characterized by different trading systems. The domestic exchange operates by automated trading, the foreign exchange uses open outcry with an automated late afternoon session. We will investigate whether these differences support the trading system segmentation hypothesis. Our working hypothesis is two-fold. First, we investigate whether the transparency of each trading system affects quote setting. Second, we analyze whether the relative transparency of each market influences the lead/lag relationship between the two markets. Both hypotheses are empirically tested for the Bund futures contract as it is traded in London (LIFFE) and Frankfurt (DTB).
JEL Classification: G13
Suggested Citation: Suggested Citation