The impact of a pro-rata algorithm on liquidity: Evidence from the NYSE LIFFE

Andrew Lepone*, Jin Young Yang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

This study investigates the impact of introducing a pure pro-rata algorithm on the liquidity of the market for Euribor futures contracts on NYSE LIFFE. Results indicate that the Euribor market experiences deterioration in liquidity: (1) both best and total depth fall and (2) quoted spreads widen after the structural change. Results also reveal that the Euribor market becomes more active after the event; both trading volume and trade frequency increase substantially after the event. Finally, after the transition, liquidity demanders are more likely to submit smaller market orders. The reduction in depth and increase in quoted spreads suggest that liquidity demanders incur higher trade execution costs after the transition. In contrast, the transition is beneficial for the exchange since trading volume is higher under the new regime.

Original languageEnglish
Pages (from-to)660-682
Number of pages23
JournalThe Journal of Futures Markets
Volume32
Issue number7
DOIs
Publication statusPublished - Jul 2012
Externally publishedYes

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