Execution quality in open-outcry futures markets

This study examines the composition of customer order .flow and the execution quality for different types of customer orders in six futures pits of the Chicago Mercantile Exchange (CME). It is shown that off-exchange customers frequently provide liquidity to other traders by submitting limit orders. The determinants of customers' choice between limit and market orders are examined, and it is found that higher bid—ask spreads increase the limit-order submission frequency, and increased price volatility makes limit-order submission less likely. Effective spreads, trading revenues, and turnaround times for customer liquidity-demanding and limit orders are also documented. Consistent with evidence from equity markets, the results show that limit-order traders receive better executions than traders using liquidity-demanding orders, but incur adverse selection costs.