The impact of electronic trading on bid-ask spreads: Evidence from futures markets in Hong Kong, London, and Sydney

During 1999 and 2000, three major futures exchanges transferred trading in stock index futures from open outcry to electronic markets: the London International Financial Futures and Options Exchange (LIFFE); the Sydney Futures Exchange (SFE); and the Hong Kong Futures Exchange (HKFE). These changes provide unique natural experiments to compare relative bid-ask spreads of open outcry vs. electronically traded markets. This paper provides evidence of a decrease in bid-ask spreads following the introduction of electronic trading, after controlling for changes in price volatility and trading volume. This provides support for the proposition that electronic trading can facilitate higher levels of liquidity and lower transaction costs relative to floor traded markets. However, bid-ask spreads are more sensitive to price volatility in electronically traded markets, suggesting that the performance of electronic trading systems deteriorates during periods of information arrival.