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The impact of a pro-rata algorithm on liquidity: Evidence from the NYSE LIFFE



This article is corrected by:

  1. Errata: Erratum: The impact of a pro-rata algorithm on liquidity: Evidence from the NYSE LIFFE Volume 32, Issue 8, 807, Article first published online: 1 June 2012

  • This research was funded by the Sydney Futures Exchange under Corporations Regulation 7.5.88(2). The authors thank workshop participants at the Business Development Group of the Australian Securities Exchange, and the comments of an anonymous referee.

Correspondence author, Discipline of Finance, Business School, University of Sydney, New South Wales 2006, Australia. Tel: +61-2-9351-6453, Fax: +61-2-9351-6461, e-mail:


This study investigates the impact of introducing a pure pro-rata algorithm on the liquidity of the market for Euribor futures contracts on NYSE LIFFE. Results indicate that the Euribor market experiences deterioration in liquidity: (1) both best and total depth fall and (2) quoted spreads widen after the structural change. Results also reveal that the Euribor market becomes more active after the event; both trading volume and trade frequency increase substantially after the event. Finally, after the transition, liquidity demanders are more likely to submit smaller market orders. The reduction in depth and increase in quoted spreads suggest that liquidity demanders incur higher trade execution costs after the transition. In contrast, the transition is beneficial for the exchange since trading volume is higher under the new regime. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:660–682, 2012