Electronic vs. Open Outcry: Side-by-Side Trading of KCBT Wheat Futures

Abstract

This study compares liquidity costs of electronic and open outcry hard red winter wheat futures contracts traded side-by-side on the Kansas City Board of Trade. Liquidity costs are considerably lower in the electronic market than in the open outcry market. A new approach is used to estimate liquidity costs that eliminates bias resulting from splitting of orders in electronic markets. The liquidity costs in the electronic market are still considerably lower after eliminating the bias. Liquidity costs were higher in after-hours trading as compared to regular trading hours suggesting a negative impact of volume on liquidity costs. Volatility of futures prices and volume per trade are positively related to liquidity costs, while a negative relation is found between daily volume and liquidity costs. Price clustering at whole cent prices is found in the open-outcry market which helps explain its higher liquidity costs. Daily volumes were distinctively higher during the rolling period as a result of Goldman-Sachs Roll, but not enough to explain the higher liquidity costs in the open outcry market. Trade size is larger in the open outcry market which suggests large traders prefer open-outcry trading.