Spreads, information flows and transparency across trading systems

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Abstract
This paper analyses the relative merits of an automated versus an open outcry trading system for a derivatives contract which is traded simultaneously at two competing exchanges. The only characterizing difference between these exchanges is the mode of operation. The domestic exchange (listing the underlying asset) operates by automated trading, the foreign exchange uses open outcry. Investigations are made to determine whether this operational competition supports a trading system segmentation hypothesis. First, quote setting is investigated to determine whether or not it is related to the transparency of the trading system. Second, analysis is carried out to determine whether the transparency of the trading system influences the lead/lag relationship in returns and volatility between the two markets. Both hypotheses are empirically tested for the Bund futures contract as it is traded in London (LIFFE) and Frankfurt (DTB).