Bund for Glory, or, it's a Long Way to Tip a Market

Abstract

Theory predicts that liquidity considerations make financial markets "tippy". In 1998, trading on Bund futures tipped from LIFFE (an open outcry exchange) to Eurex (an electronic market). Measures of spreads on LIFFE and Eurex did not change markedly in the eighteen month period over which Eurex achieved dominance in Bund futures trading, but a measure of market depth did worsen on LIFFE as tipping proceeded. The evidence suggests that trading fee differentials and operational efficiences were the key factors in preciptiating the shift in volume. The "sponsorship" of the Eurex platform by German banks narrowed liquidity cost differences sufficiently to permit Eurex to charge lower fees and thereby undercut total trading costs on LIFFE.