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Abstract

This study compares liquidity costs and other characteristics of electronic and open outcry hard red winter wheat futures contracts traded on the Kansas City Board of Trade. Liquidity costs are considerably lower in the electronic market than in the open outcry market. A new approach is used to estimate liquidity costs which eliminates bias resulting from splitting of orders in electronic markets. The liquidity costs are still considerably lower after correcting the bias in electronic market. Liquidity costs were higher in after-hours trading as compared to regular trading hours suggesting a negative impact of volume on liquidity costs. Volatility of futures prices and volume per trade are positively related to liquidity costs, while a negative relation is found between daily volume and liquidity costs. Round-number pricing is more prevalent in the open outcry market. Daily volumes were found distinctively higher during the rolling period as a result of Goldman-Sachs Roll. Trade size is larger in the open outcry market.

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