London International Financial Futures and Options Exchange
- This article is about the LIFFE, until the takeover by Euronext
LIFFE is now part of IntercontinentalExchange group following a series of takeovers. Euronext acquired LIFFE in 2002, and were then in turn taken over by NYSE in 2007, to form NYSE Euronext. The main rationale for this transaction was to gain ownership of LIFFE. In the same manner, IntercontinentalExchange then purchased NYSE Euronext in 2013, principally to acquire LIFFE. Although no longer under independent ownership, these series of takeovers have underlined the continuing value and importance of the LIFFE business among listed derivatives exchanges.
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 Trade and the Chicago Mercantile Exchange. It initially offered futures contracts and options 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.
Move to electronic trading
LIFFE had had big plans to expand, and intended to redevelop Spitalfields Market 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 derivatives 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.
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-tac 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 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.
What probably sustained LIFFE's trading floor alongside other electronic exchanges such as DTB for some time was the opportunity for arbitrage. 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.
- Durica, Dr. Michael (2006). Product Development for Electronic Derivative Exchanges: The case of the German ifo business climate index as underlying for exchange traded derivatives to hedge business cycle risk. Pro Business. Berlin.