Working paper No. 76
By Francis Breedon and Allison Holland
The Bund (ten-year German government bond) futures contract is the most actively traded bond contract in Europe; it is traded in both London (LIFFE) and Frankfurt (DTB) on open outcry and electronic trading platforms respectively. This paper evaluates the relative liquidity and price discovery roles of these markets and seeks to reconcile the conflicting results of earlier studies. We find these conflicting results are largely a product of the price data used. Using both transactions prices and quotes data, we find that variable transaction costs and the contribution to price formation of each market is similar. The main differences between the two markets are the larger trade size on the open outcry market (compensating perhaps for the higher running cost of an open outcry operation) and a tendency for trading to move toward the open outcry market during volatile periods.
Electronic versus open outcry markets: The case of the bund futures contract