Execution Quality in Open Outcry Futures Markets

This study examines order flow composition and execution quality for different types of customer orders in six futures pits of the Chicago Mercantile Exchange (CME). We show that off-exchange customers frequently provide liquidity to other traders by submitting limit orders. We also document effective execution costs and turnaround times for customer liquiditydemanding and limit orders. The results imply that negative execution costs reported by Ferguson and Mann (2001) are likely to be explained by customer limit orders earning the bidask spread. We also find that customer limit orders do not appear to be systematically “picked off” by market makers. Finally, we show that common estimators of the bid-ask spread can be used as a proxy for the cost of immediacy faced by off-exchange customers. ∗ School of Management, Binghamton University (SUNY), Binghamton, New York 13902-6000. Tel: 607-777-5199. Fax: 607-777-4422. E-Mail: [email protected]. I thank Grigori Erenburg, Peter Locke, Tatyana Zabotina and especially Dennis Lasser for helpful comments and suggestions. Any remaining errors are my own.