London International Financial Futures and Options Exchange (LIFFE)
The London International Financial Futures and Options Exchange (LIFFE) is a futures exchange located in London. Sir Brian Williamson established the LIFFE on September 30, 1982 to take advantage of the UK’s removal of currency controls in 1979. Originally located in the historic Royal Exchange building near Bank, it later transferred to Cannon Bridge in 1991. Initially, it offered futures contracts and options only. However, after merging with the London Traded Options Market in 1993, it started offering equity options as well. It then changed its name to the London International Financial Futures and Options Exchange.
After merging with the London Commodity Exchange in 1996, a range of soft and agricultural commodity contracts was also added to the product list. By 1996, LIFFE had become one of the largest futures exchanges in Europe. It was followed by other European exchanges such as the MATIF (based in Paris) and the Deutsche Terminboerse (based in Frankfurt).
Originally, one of the most widely-traded products on the LIFFE was a futures contract on Bunds, a 10-year German Government Bond. The DTB offered a similar product but since it was an electronic exchange, it charged lower fees. Soon, DTB’s market share grew further, leaving LIFFE with only 10%. LIFFE, which posted a profit of £57m in 1997, reported a loss of £64m in the following year.
The LIFFE was taken over by Euronext in 2002 and thus joined the exchanges of Amsterdam, Brussels, Paris, and Lisbon. Euronext was in turn taken over by the New York Stock Exchange in 2007 to form NYSE Euronext. The very purpose of this was to take control over the LIFFE. In 2013, the Intercontinental Exchange purchased NYSE Euronext, with the principal motive of acquiring the LIFFE.
LIFFE Trading Mechanisms
The London International Financial Futures and Options Exchange was originally structured after the Chicago Board of Trade and the Chicago Mercantile Exchange, with trading on an open outcry basis wherein traders meet on the trading floor or the “pit” to conduct the transactions.
#1 Electronic Trading
After losing a substantial amount of market share for its main product, Bunds futures contracts, the LIFFE decided to develop an electronic trading platform. Initially, it put up an electronic trading platform known as Automated Pit Trading that was only used for after-hours trading. Now, the LIFFE uses a new electronic trading platform known as LIFFE CONNECT. On 24 November 2000, the last three of the once 26 open outcry pits were permanently closed. Through LIFFE CONNECT, the exchange was able to reach out to customers from around 25 countries. Euronext CEO Jean-Francois Theodore claimed that it was the scope of the exchange’s business as well as its trading technology that attracted them to acquire it. However, many theorists still believe that it was the delay in embracing electronic trading technology that led the exchange to lose its independence.
One of the reasons that made the LIFFE competitive against its electronic counterparts such as the DTB was the practice of arbitrage. With the Bunds contracts being traded at both LIFFE and DTB, the opportunity for arbitrage was open. Arbitrage was frequently conducted. However, due to complex prerequisites, arbitrage trading was restricted to institutional participants in the market only.