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

This study compares liquidity costs of electronic and open-outcry wheat futures contracts traded side-by-side on the Kansas City Board of Trade. Liquidity costs are considerably lower in the electronic market. Liquidity costs in the electronic market are still considerably lower after eliminating the bias created by splitting orders in the electronic market. Price volatility and transaction size are positively related to liquidity costs, while a negative relation is found between daily volume and liquidity costs. Price clustering at whole cent prices occurs in the open-outcry market which helps explain its higher liquidity costs. Daily volumes were distinctively higher during the 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.