An Empirical Analysis of Price and Time Priority and Pro Rata Trade Execution Algorithms in Screen-Traded Markets

Abstract

One of the biggest issues in futures markets today is the introduction and proliferation of all-electronic exchanges and the procedures they will adopt for trading. This article looks at the impact of a 1998 change in trading procedures for Eurodollar futures on the Globex2 system used for after-hours trading by the Chicago Mercantile Exchange. The original system, which maintained price and time priority for limit orders on the book, was replaced by one with pro rata allocation for all orders at the same price, regardless of time arrival. The existence of the regular hours open outcry system operating without change during the same time period provides a control sample against which the behavior of Globex2 prices in the two different regimes can be compared. The results suggests that the change in the trading algorithm had no significant effect on the bid-ask spread or on the volatility in this market.