The liquidity of automated exchanges: New evidence from German bund futures

Previous literature has suggested that automated exchanges such as the Deutsche Terminborse (DTB) may be less liquid than their open-outcry counterparts such as the London International Financial Futures Exchange (LIFFE), although evidence provided on this issue has been mixed. This paper provides new evidence on the relative magnitudes of bid-ask spreads in the Bund contract traded on the DTB and LIFFE using intraday data from a period in which each exchanges share of total Bund trading was closer than previous research. The findings suggest that quoted bid-ask spreads are wider on the LIFFE than the DTB, even after controlling for their determinants. Furthermore, bid-ask spreads on the DTB increase more rapidly as price volatility increases relative to the LIFFE. Overall, this evidence implies that while automated exchanges are capable of providing more liquidity than floor traded exchanges, the relative performance of automated exchanges deteriorates during periods of higher volatility.