Volume 14 | Issue 3 | Article 3

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Intraday Liquidity Provision in Electronic Futures Markets: "LIFFE" without the Pits
Tatyana Zabotina, Ronald W. Spahr, and Nancy J. Scannell (G10)

We find that intraday variation in profits and quoting behavior of liquidity providers at the London International Financial Futures and Options Exchange (LIFFE), an electronic futures market, differs from variaton in profits and quoting behavior observed on an open outcry market. Document trading profits of liquidity providers, locals, at open outcry futures markets are primarily determined by market maker obligations (or, more aptly, lack thereof) and pit trading. In an electronic market, absent a trading pit, adverse selection and inventory management of voluntary liquidity providers affect trading profits of limit order traders in a manner similar to trading profits on transparent markets with liquidity supplied by competitive dealers. We examine separate evolutions of bid and ask quotes; our findings support the notion that limit order traders pursue trading strategies different from those of locals in open outcry markets.