Commercial contracts calling for the purchase or sale of specified quantities of a good at specified future dates. The good in question may be grain, livestock, precious metals, or financial instruments such as treasury bills. Up until the time the contract calls for the delivery of the good, the contract is subject to speculation. Futures contracts originated in the trade in agricultural commodities; for example, American grain farmers were able to sell their harvest in advance on the Chicago Board of Trade, a commodity exchange.
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The London International Financial Futures and Options Exchange (LIFFE, pronounced 'life' as in 'human life', and never 'liff-eee') was the name of a futures exchange based in London, prior to its takeover by Euronext in January 2002. It is currently known as Euronext.liffe. Euronext subsequently merged with New York Stock Exchange in April 2007.
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 during 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%.
Around this time LIFFE 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 trading. With the loss of the market for their main product, Bund future contracts, all expansion plans were shelved, and LIFFE moved to an all electronic trading model in 1998. 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 LIFFE CONNECT for all trading.
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. For information on LIFFE after the take-over, see Euronext.liffe.
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 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 those 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.
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 kept LIFFE alive for a while alongside other exchanges such as DTB were arbitrage opportunities. 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.