London International Financial Futures and Options Exchange
Encyclopedia
The London International Financial Futures and Options Exchange (LIFFE, pronounced 'life') is a futures exchange
based in London
. LIFFE is now part of NYSE Euronext following its takeover by Euronext
in January 2002 and Euronext's merger with New York Stock Exchange
in April 2007.
and the Chicago Mercantile Exchange
. It initially offered futures contract
s and option
s linked to short term interest rates. In 1993 LIFFE merged with the London Traded Options Market (LTOM), adding equity options to its product range. This is when it changed its name to the London International Financial Futures and Options Exchange. In 1996 it merged with the London Commodity Exchange (LCE), and, as a result, a range of soft and agricultural commodity contracts was added to its products offering. Trading was conducted by open outcry
, where traders meet on the trading floor (in what is called the pit) to conduct trades.
By the end of 1996, LIFFE was by far the biggest futures exchange in Europe, followed by the MATIF
in Paris and the Deutsche Terminbörse (DTB) in Frankfurt. The DTB was an electronic exchange founded in 1990 and the predecessor to Eurex
. LIFFE's most-traded product was a futures contract
on Bunds, the 10 year German Government Bond. The DTB offered an identical product but, as an electronic exchange, it had a lower cost base. The progress of DTB can be gauged from the fact that in mid-1997 the DTB had less than 25% of the market. By October, it had more than 50%, and a couple of months later LIFFE was left with only 10%. The Bund represented about a third of LIFFE's business. The exchange, which had turned in a profit of £57m in 1997, reported a loss of £64m in 1998.
in the City of London
as they needed a larger building for their open outcry. With the loss of the market for their main product, Bund futures contracts, all expansion plans were shelved. LIFFE realised that, to compete, it had urgently to develop an electronic trading platform
instead. It already had an electronic platform called Automated Pit Trading (APT), which was used in after-hours trading
when the trading pit was closed. LIFFE now developed a new trading platform, LIFFE CONNECT, for all trading, including the exchange's range of short-term interest rate derivative
s contracts. After the creation of the euro in 1999 the exchange won the lion's share of trading in euro-denominated short term interest rate derivatives - the EURIBOR
contract. On Friday November 24, 2000 at 5pm, the last three of the once 26 open outcry pits were permanently closed. The design of LIFFE CONNECT made it possible for customers to choose which trading software they would use. LIFFE intended that this flexibility would encourage traders around the world to link to the exchange. And, by the beginning of 2002, customers in 25 countries around the world were trading on LIFFE. This completed a revolution in LIFFE's business: whereas traders had once had to come to LIFFE; now, through LIFFE CONNECT, LIFFE took its market to its customers wherever they were in the world.
Seeing LIFFE CONNECT’s potential, the Blackstone Group
and Battery Ventures
invested £44m in Liffe to finance the commercial development of the trading platform so that it could be sold to other exchanges. Liffe went on to sell the technology to three exchanges, TIFFE (now renamed the Tokyo Financial Exchange
) (2001), the Chicago Board of Trade
(2003) and the Tokyo Stock Exchange
(2008). Early in 2001 LIFFE said that it had returned to profit. In September that year the exchange announced that it had received a number of expressions of interest in buying the business.
In January 2002 LIFFE was acquired by Euronext
, joining the exchanges of Amsterdam
, Brussels
, Paris
and Lisbon
. Together with the derivative arms of the continental European exchanges it became Euronext.liffe. Some analysts say that LIFFE had to give up its independence because it had failed to embrace technology early enough. However, in evidence to the Treasury Select Committee, Euronext's chief executive, Jean-Francois Theodore, said that it was the span of LIFFE's business and its trading technology that had attracted Euronext
to make its bid. "[F]rom the very foundation of Euronext in March 2000, we said ... that the best partner would be LIFFE and the best system to work with would be CONNECT", he told the Committee on 22 January 2002. For information on LIFFE after the take-over, see LIFFE's website.
that a bookmaker would use at a racecourse. Contract prices were signalled with the hand held away from the body with the palm of the hand facing away meaning to sell and the palm of the hand facing towards oneself meaning to buy. Contract quantities were communicated with the hand touching the body with individual units displayed on the chin, tens of units on the forehead, hundreds and thousands of units on the forearm again with the hand facing away meaning to sell and towards oneself to buy. A project to record the hand signal language of the trading pit is currently being compiled at Tradingpithistory.com LIFFE Hand Signals
. The contracts on the German Bund traded at LIFFE and DTB were financially equivalent, opening up arbitrage opportunities between the marketplaces. A bund contract being offered at 98.15 at LIFFE, simultaneously being bid for 98.18 on DTB could result in a risk-free profit of 3 Ticks buying at LIFFE and simultaneously selling on DTB, but would leave an open position in each separate exchange. Arbitrage was frequently conducted, due to the complex prerequisites restricted mostly to institutional market participants.
Prior to the move to Cannon Street, the LIFFE social life was certainly wilder around the Royal Exchange. The Greenhouse in front of the market was the champagne bar of choice during the day, but the drinking & dancing on the bar at the Arbitrager won't be forgotten amongst the traders of the late 80's.
Futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
based in London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
. LIFFE is now part of NYSE Euronext following its takeover by Euronext
Euronext
Euronext N.V. is a pan-European stock exchange based in Amsterdam and with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. In addition to equities and derivatives markets, the Euronext group provides clearing and information services...
in January 2002 and Euronext's merger with New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
in April 2007.
History
The London International Financial Futures Exchange (LIFFE), established by Sir Brian Williamson started life on 30 September, 1982, to take advantage of the removal of currency controls in the UK in 1979. The exchange modelled itself after the Chicago Board of TradeChicago Board of Trade
The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...
and the Chicago Mercantile Exchange
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
. It initially offered futures contract
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
s and option
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
s linked to short term interest rates. In 1993 LIFFE merged with the London Traded Options Market (LTOM), adding equity options to its product range. This is when it changed its name to the London International Financial Futures and Options Exchange. In 1996 it merged with the London Commodity Exchange (LCE), and, as a result, a range of soft and agricultural commodity contracts was added to its products offering. Trading was conducted by open outcry
Open outcry
Open outcry is the name of a method of communication between professionals on a stock exchange or futures exchange. It involves shouting and the use of hand signals to transfer information primarily about buy and sell orders...
, where traders meet on the trading floor (in what is called the pit) to conduct trades.
By the end of 1996, LIFFE was by far the biggest futures exchange in Europe, followed by the MATIF
MATIF
MATIF SA is a private corporation which is both a futures exchange and a clearing house in France. It was absorbed in the merger of the Paris Bourse with Euronext NV to form Euronext Paris...
in Paris and the Deutsche Terminbörse (DTB) in Frankfurt. The DTB was an electronic exchange founded in 1990 and the predecessor to Eurex
Eurex
Eurex is one of the world's leading derivatives exchanges, providing European benchmark derivatives featuring open and low-cost electronic access globally...
. LIFFE's most-traded product was a futures contract
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
on Bunds, the 10 year German Government Bond. The DTB offered an identical product but, as an electronic exchange, it had a lower cost base. The progress of DTB can be gauged from the fact that in mid-1997 the DTB had less than 25% of the market. By October, it had more than 50%, and a couple of months later LIFFE was left with only 10%. The Bund represented about a third of LIFFE's business. The exchange, which had turned in a profit of £57m in 1997, reported a loss of £64m in 1998.
Move to electronic trading
LIFFE had had big plans to expand, and intended to redevelop Spitalfields MarketOld Spitalfields market
Old Spitalfields Market is a covered market in Spitalfields, just outside the City of London. It is in the London Borough of Tower Hamlets....
in the City of London
City of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
as they needed a larger building for their open outcry. With the loss of the market for their main product, Bund futures contracts, all expansion plans were shelved. LIFFE realised that, to compete, it had urgently to develop an electronic trading platform
Electronic trading platform
In finance, an Electronic trading platform is a computer system that can be used to place orders for financial products over a network with a financial intermediary. This includes products such as shares, bonds, currencies, commodities and derivatives with a financial intermediary, such as a...
instead. It already had an electronic platform called Automated Pit Trading (APT), which was used in after-hours trading
Extended hours trading
After-hours trading is stock trading that occurs after the traditional trading hours of the major exchanges, such as the New York Stock Exchange and the Nasdaq Stock Market. Since 1985, the regular trading hours in America have been from 9:30 a.m. to 4:00 p.m...
when the trading pit was closed. LIFFE now developed a new trading platform, LIFFE CONNECT, for all trading, including the exchange's range of short-term interest rate derivative
Interest rate derivative
An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a notional amount of money at a given interest rate...
s contracts. After the creation of the euro in 1999 the exchange won the lion's share of trading in euro-denominated short term interest rate derivatives - the EURIBOR
Euribor
The Euro Interbank Offered Rate is a daily reference rate based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market .-Scope:...
contract. On Friday November 24, 2000 at 5pm, the last three of the once 26 open outcry pits were permanently closed. The design of LIFFE CONNECT made it possible for customers to choose which trading software they would use. LIFFE intended that this flexibility would encourage traders around the world to link to the exchange. And, by the beginning of 2002, customers in 25 countries around the world were trading on LIFFE. This completed a revolution in LIFFE's business: whereas traders had once had to come to LIFFE; now, through LIFFE CONNECT, LIFFE took its market to its customers wherever they were in the world.
Seeing LIFFE CONNECT’s potential, the Blackstone Group
Blackstone Group
The Blackstone Group L.P. is an American-based alternative asset management and financial services company that specializes in private equity, real estate, and credit and marketable alternative investment strategies, as well as financial advisory services, such as mergers and acquisitions ,...
and Battery Ventures
Battery Ventures
Battery Ventures is a venture capital firm that invests principally in technology markets including: Internet & Digital Media; Financial & Information Services; Cleantech; Software; Semiconductors & Components; Infrastructure Technologies; Communication Services; and Industrial Technologies.The...
invested £44m in Liffe to finance the commercial development of the trading platform so that it could be sold to other exchanges. Liffe went on to sell the technology to three exchanges, TIFFE (now renamed the Tokyo Financial Exchange
Tokyo Financial Exchange
is a futures exchange and established in April 1989 under the Financial Futures Trading Law of Japan. It principally deals in financial instrument markets that handles securities as well as market derivatives....
) (2001), the Chicago Board of Trade
Chicago Board of Trade
The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...
(2003) and the Tokyo Stock Exchange
Tokyo Stock Exchange
The , called or TSE for short, is located in Tokyo, Japan and is the third largest stock exchange in the world by aggregate market capitalization of its listed companies...
(2008). Early in 2001 LIFFE said that it had returned to profit. In September that year the exchange announced that it had received a number of expressions of interest in buying the business.
In January 2002 LIFFE was acquired by Euronext
Euronext
Euronext N.V. is a pan-European stock exchange based in Amsterdam and with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. In addition to equities and derivatives markets, the Euronext group provides clearing and information services...
, joining the exchanges of Amsterdam
Amsterdam
Amsterdam is the largest city and the capital of the Netherlands. The current position of Amsterdam as capital city of the Kingdom of the Netherlands is governed by the constitution of August 24, 1815 and its successors. Amsterdam has a population of 783,364 within city limits, an urban population...
, Brussels
Brussels
Brussels , officially the Brussels Region or Brussels-Capital Region , is the capital of Belgium and the de facto capital of the European Union...
, Paris
Paris
Paris is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
and Lisbon
Lisbon
Lisbon is the capital city and largest city of Portugal with a population of 545,245 within its administrative limits on a land area of . The urban area of Lisbon extends beyond the administrative city limits with a population of 3 million on an area of , making it the 9th most populous urban...
. Together with the derivative arms of the continental European exchanges it became Euronext.liffe. Some analysts say that LIFFE had to give up its independence because it had failed to embrace technology early enough. However, in evidence to the Treasury Select Committee, Euronext's chief executive, Jean-Francois Theodore, said that it was the span of LIFFE's business and its trading technology that had attracted Euronext
Euronext
Euronext N.V. is a pan-European stock exchange based in Amsterdam and with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom. In addition to equities and derivatives markets, the Euronext group provides clearing and information services...
to make its bid. "[F]rom the very foundation of Euronext in March 2000, we said ... that the best partner would be LIFFE and the best system to work with would be CONNECT", he told the Committee on 22 January 2002. For information on LIFFE after the take-over, see LIFFE's website.
LIFFE traders and brokers
LIFFE accredited traders, particularly those engaged in the open outcry trading pits, could and did earn high salaries at the price of a demanding and stressful job. Floor support personnel (Runners, Midoffice and exchange staff), in contrast, usually earned a lot less. LIFFE floor staff were easily identified by their distinctive and brightly coloured blazers (yellow jackets for Runners) and badges with three-letter IDs called 'Mnemonics'.The Language of LIFFE
The exchange floor was an extremely noisy place with Phone Brokers and Pit Traders shouting instructions to each other and Exchange Officials overseeing their conduct and confirming trades. Exchange members (Banks and Brokers) would pay a premium to have a booth position close to the trading pits to enable slightly easier communication with their pit traders. However the most common form of communication was via hand signals, not too dissimilar to tic-tacTic-tac
Tic-tac is a traditional method of signs used by bookmakers to communicate the odds of certain horses. It is still used in on-course betting in the UK...
that a bookmaker would use at a racecourse. Contract prices were signalled with the hand held away from the body with the palm of the hand facing away meaning to sell and the palm of the hand facing towards oneself meaning to buy. Contract quantities were communicated with the hand touching the body with individual units displayed on the chin, tens of units on the forehead, hundreds and thousands of units on the forearm again with the hand facing away meaning to sell and towards oneself to buy. A project to record the hand signal language of the trading pit is currently being compiled at Tradingpithistory.com LIFFE Hand Signals
LIFFE social life
LIFFE pit traders and locals (Traders trading on their own account, betting their own funds) in particular enjoyed a reputation of a lavish lifestyle - pubs and wine houses along Cannon Street were filled with LIFFE personnel at all times of the day and night. Visitors to the LIFFE floor were often surprised by the harsh emotional conditions and chaotic-looking floor, with paper snipplets covering the floor and abuse frequently being yelled, albeit jokingly, at them.Arbitrage
What probably sustained LIFFE's trading floor alongside other electronic exchanges such as DTB for some time was the opportunity for arbitrageArbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
. The contracts on the German Bund traded at LIFFE and DTB were financially equivalent, opening up arbitrage opportunities between the marketplaces. A bund contract being offered at 98.15 at LIFFE, simultaneously being bid for 98.18 on DTB could result in a risk-free profit of 3 Ticks buying at LIFFE and simultaneously selling on DTB, but would leave an open position in each separate exchange. Arbitrage was frequently conducted, due to the complex prerequisites restricted mostly to institutional market participants.
Prior to the move to Cannon Street, the LIFFE social life was certainly wilder around the Royal Exchange. The Greenhouse in front of the market was the champagne bar of choice during the day, but the drinking & dancing on the bar at the Arbitrager won't be forgotten amongst the traders of the late 80's.