Increased Efficiency in Electronic Markets: Liquidity vs. Informed Trading

This study examines market efficiency differences between open outcry and electronic exchanges under varying liquidity conditions for the FTSE-100 Index Futures Contract. In line with previous literature, this study finds that liquidity provision and market efficiency have increased on the electronic exchange. Unlike previous literature, this study finds that private information provision decreased between exchange types. Under standard liquidity conditions, clear efficiency differences exist between the open outcry and electronic regimes. However, by employing a liquidity adjustment procedure, this study finds no difference in efficiency between the two exchange types. Based on previous literature, this study concludes that higher efficiency in electronic exchanges is due to enhanced liquidity provision from informed traders and not private information provision.