London Financial Futures and Options Exchange – Definition

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London International Financial Futures and Options Exchange Definition

London International Financial Futures and Options Exchange, LIFFE, is a leading market for interchange options and characteristics on Euro money market derivatives.  It is a platform through which goods of variant derivatives are exchanged electronically.

A Little More on What is the London International Financial Futures and Options Exchange

LIFFE was established in 1982 and 2000 it initiated operation electronically through the closure of its trading doors and later in two years it was purchased by Euronext. Series on taking overs has been witnessed in the LIFFE, after being acquired by Euronext in 2002, it was acquired by NYSE five years later, that`s, in 2007. NYSE was bought by Intercontinental Exchange Group in 2013 inevitably making LIFFE part of Intercontinental Exchange Group. LIFFE has gone through a series of expansion which was part of their huge plans one of them being the redevelopment of Spitalfields Market in the city of London which offered them a large building for their open outcry. Expansion plans for LIFFE were shelved after they lost the market for their main product. In order for LIFFE to compete effectively, LIFFE realizes that they had to develop a new version of the electronic trading platform which they called LIFFE CONNECT, which was improved and better version of its predecessor. LIFFE CONNECT was used to for all trading including the exchange range for interest rate derivatives contracts in the short-term. Traders and locals of LIFFE who own their own account and betting their own money enjoyed branding of profligate lifestyle. Pubs and wine houses along Cannon Street also recorded a massive number of LIFFE personnel all at the day and night times. Clients visiting chaotic and untidy LIFFE offices were subjected to abuse and yelling. What sustained LIFFE trading floors along with other electronic exchanges, for example, DTB was an opportunity for arbitrage. There was financial equivalence in the contracts on the German Bund traded at LIFFE and DTB which later opened arbitrage opportunities among the two marketplaces.

References for London International Financial Futures and Options Exchange

Academic Research on London International Financial Futures & Options Exchange (LIFFE)

Strategic risk positioning as sensemaking in crisis: the adoption of electronic trading at the London international financial futures and options exchange, Scott, S. V., & Barrett, M. I. (2005). The Journal of Strategic Information Systems, 14(1), 45-68. This paper explains how the loss of prime benchmark product from the LIFFE manual trading environment to an electronic trading platform of DTB/Eurex caused a crisis which was between 1997-2000. The paper also examines the response of bigger international financial feature exchanges and the reason why those holding offices at the industry for a long time snubbed the risk from electronic trading for a long time. The paper also broadens its examination of responses from a wider financial community to the events of the strategic crisis. The findings of this paper pose concentration to the practitioners holding offices at organizations who have the obligation of managing potential dangers from new entrants and academics trying to come up with theoretical apparatus for anchorage of strategic crises involved with the new technology.

Demutualization and public offerings of financial exchanges, Aggarwal, R., & Dahiya, S. (2006). Journal of Applied Corporate Finance, 18(3), 96-106. The merger of NYSE with Archipelago, a publicly listed electronic exchange can be observed as a terminal phase of movement of organizational changes that have covered most of the world`s major financial exchanges in the last decade. Almost all stocks and derivatives exchanges were non-profitable until the early 1990s. They were organized by their members in a mutual organization.  The author of this paper indicates that deregulation and the new development in technology have caused covert conflicts of concern amongst the mutual form of organization to become unbearable ones. The author also denotes that operating performance and share value has risen because of public ownership and switch to for-profit status.

Constructing a market, performing theory: The historical sociology of a financial derivatives exchange, MacKenzie, D., & Millo, Y. (2003). American journal of sociology, 109(1), 107-145. According to the analysis conducted on the performativity of economics a theme developed by Callon on economic sociology basing on the history of Chicago Board Options Exchange, economics was requisite in the creation of financial derivatives exchanges. This helps cure the loss of legitimacy experienced by derivatives in the initial half of the 20th century. The performativity of economic has limitation and emphasis on it can be incorporated by classic themes economic sociology.

Extreme price clustering in the London equity index futures and options markets, Ap Gwilym, O., Clare, A., & Thomas, S. (1998). Journal of Banking & Finance, 22(9), 1193-1206. This paper provides relevance to the debate on price clustering and optimal tick sizes. According to findings on this paper, 98% of traded and quoted prices occur at even intervals for LIFFE stock derivatives. According to this paper, volatility and transaction frequency are directly proportional to clusters but inverse to trade size. In a near open market, the good ticks are lower whilst they are high in a near close market.

The impact of electronic trading on bid‐ask spreads: Evidence from futures markets in Hong Kong, London, and Sydney, Aitken, M. J., Frino, A., Hill, A. M., & Jarnecic, E. (2004). Journal of Futures Markets: Futures, Options, and Other Derivative Products, 24(7), 675-696. Three major future exchanges transferred trading in stock index futures from open outcry during 1999 and 2000, and these changes offered distinct inherent experiments to compare relative bid-ask spreads of electronically traded markets versus open outcry. It`s evident in this paper that there is a decrease in bid-ask spreads after the introduction of electronic trading. This backs the idea that electronic trading enhances higher levels of liquidity and reduces transaction cost that`s relative to the floor trade market.

London as an international financial centre. Coakley, J. (2005). In Global finance and urban living (pp. 65-84). Routledge. London is one of the major financial centers in the globe. According to the Global finance index 2018, London was second on the list with a narrow difference from position one that is New York City. The quality of business education in London is the highest in the world. It also boasts a very skilled workforce and a flexible labor market. The cluster effect of the number of different financial firms in London lower rate of unemployment and economic output are what makes London an international centre according to this paper.

The direct and compliance costs of financial regulation, Franks, J. R., Schaefer, S. M., & Staunton, M. D. (1997). Journal of Banking & Finance, 21(11-12), 1547-1572. According to this paper, the estimation of both direct and indirect costs of regulation for major sectors in the service industry of the UK was attempted. A benchmark was drowned on the competitive rank of the UK service industry after comparing the cost of the US and France service industry. This paper further ascertains that the cost of regulation of securities and derivatives are considerably lower for the UK than for both the US and France.

The liquidity of automated exchanges: new evidence from German Bund futures. Frino, A., McInish, T. H., & Toner, M. (1998). Journal of International Financial Markets, Institutions and Money, 8(3-4), 225-241. According to this paper, the liquidity of automated exchanges such as DTB is lower than the open outcry such as LIFFE. New evidence is provided by this paper on the degree of bid-ask spreads as seen in the Bund contract traded on LIFFE and DTB. According to the findings of this paper, bid-ask spreads that are quoted are broader on the LIFFE than DTB even after their determinants are controlled. Relative performance of automated exchanges can decline during seasons of higher volatility.

Pricing interest rate futures options with futures‐style margining. Chen, R. R., & Scott, L. (1993). Journal of Futures Markets, 13(1), 15-22. This paper describes an overview of the distinction of the margining of equity style and future style option contracts. This paper indicates that margining is the deposit of good faith to be deposited by a substitute writer. Processes of calculating, measuring, and administering collateral are margining. Premium paid upfront or equity style margin is paid fully at the time of option acquisition. Current market value should be taken into consideration in estimating the total initial margin requirement as long as trade remains open.

A note on execution costs for stock index futures: Information versus liquidity effects, Berkman, H., Brailsford, T., & Frino, A. (2005). Journal of Banking & Finance, 29(3), 565-577. This paper analyses the cost and impact of results of trade size for stock index futures and execution cost applying price –volume transaction information from LIFFET. The author of the paper found that stock markets were bigger compared to executive half spreads. This finding is significant in understanding equity index products which include index futures and traded funds. The author also found that between purchases and sales for stock index futures across different trade sizes, there is no asymmetry in post-trade price reaction.

Stock index futures listing and structural change in time‐varying volatility. Lee, S. B., & Ohk, K. Y. (1992). Journal of Futures Markets, 12(5), 493-509.  Since the financial crash of October 1987, stock return volatility has received great attention. Policymaker in the US and other countries contribute to the speculation of volatility to financial markets. The universal critic on volatility is that futures markets are naturally more volatile than cash market. This is because market participants are oriented and highly leveraged than market investors. Introduction of stock index futures trading may destabilize prices according to some theories, though the issue has a complexity that illicit investigation.

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