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London International Financial Futures and

Options Exchange

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This article is about the LIFFE, until the takeover byEuronext

LIFFE Trader opposite Cannon Street station.

The London International Financial Futures and Options Exchange(LIFFE, pronounced

'life') is afutures exchangebased inLondon.LIFFE is now part ofNYSE Euronextfollowing itstakeover byEuronextin January 2002 and Euronext's merger withNew York Stock ExchangeinApril 2007.

Contents

1 History

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2 Move to electronic trading 3 LIFFE traders and brokers 4 The Language of LIFFE 5 LIFFE social life 6 Arbitrage 7 References 8 External links

History

The London International Financial Futures Exchange(LIFFE), established by Sir Brian

Williamson[1]

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 Tradeand

theChicago Mercantile Exchange.It initially offeredfutures contractsandoptionslinked to shortterm interest rates. In 1993 LIFFE merged with theLondon Traded Options Market(LTOM),

adding equity options to its product range. This is when it changed its name to the LondonInternational Financial Futures and OptionsExchange. In 1996 it merged with theLondon

Commodity Exchange(LCE), and, as a result, a range of soft and agricultural commoditycontracts was added to its products offering. Trading was conducted byopen 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

MATIFinParisand the Deutsche Terminbrse (DTB) inFrankfurt.The DTB was an electronic

exchange founded in 1990 and the predecessor toEurex.LIFFE's most-traded product was afutures contractonBunds, 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 Bundrepresented 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 redevelopSpitalfields Marketin theCity ofLondonas 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 anelectronic trading platforminstead. It already hadan electronic platform called Automated Pit Trading (APT), which was used in after-hourstradingwhen the trading pit was closed. LIFFE now developed a new trading platform, LIFFE

CONNECT, for all trading, including the exchange's range of short-terminterest rate derivatives

contracts. After the creation of the euro in 1999 the exchange won the lion's share of trading ineuro-denominated short term interest rate derivatives - theEURIBORcontract. 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

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ondon_International_Financial_Futures_and_Options_Exchange#Referenceshttp://en.wikipedia.org/wiki/London_International_Financial_Futures_and_Options_Exchange#Arbitragehttp://en.wikipedia.org/wiki/London_International_Financial_Futures_and_Options_Exchange#LIFFE_social_lifehttp://en.wikipedia.org/wiki/London_International_Financial_Futures_and_Options_Exchange#The_Language_of_LIFFEhttp://en.wikipedia.org/wiki/London_International_Financial_Futures_and_Options_Exchange#LIFFE_traders_and_brokershttp://en.wikipedia.org/wiki/London_International_Financial_Futures_and_Options_Exchange#Move_to_electronic_trading

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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: whereastraders 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 CONNECTs potential, theBlackstone GroupandBattery Venturesinvested

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 (nowrenamed theTokyo Financial Exchange)(2001), theChicago 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 byEuronext,joining the exchanges ofAmsterdam,

Brussels,ParisandLisbon.Together with the derivative arms of the continental European

exchanges it became Euronext.liffe. Some analysts say that LIFFE had to give up itsindependence 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 thatit was the span of LIFFE's business and its trading technology that had attractedEuronextto

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, seeLIFFE'swebsite.

LIFFE traders and brokers

LIFFE accredited traders, particularly those engaged in the open outcry trading pits, could anddid 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 staffwere 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 confirmingtrades. 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 totic-tacthata 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 handtouching 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

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and towards oneself to buy. A project to record the hand signal language of the trading pit is

currently being compiled atTradingpithistory.com LIFFE Hand Signals

LIFFE social life

LIFFE pit traders and locals (Traders trading on their own account, betting their own funds) inparticular 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 asDTB for some time was the opportunity forarbitrage.The contracts on the German Bund traded

at LIFFE and DTB were financially equivalent, opening up arbitrage opportunities between themarketplaces. A bund contract being offered at 98.15 at LIFFE, simultaneously being bid for98.18 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 marketparticipants. Prior to the move to Cannon Street, the LIFFE social life was certainly wilderaround 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.

References

1. ^http://people.forbes.com/profile/brian-williamson/41845 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.

http://tradingpithistory.com/gallery/22/participants/liffe/http://tradingpithistory.com/gallery/22/participants/liffe/http://tradingpithistory.com/gallery/22/participants/liffe/http://en.wikipedia.org/wiki/Arbitragehttp://en.wikipedia.org/wiki/Arbitragehttp://en.wikipedia.org/wiki/Arbitragehttp://en.wikipedia.org/wiki/London_International_Financial_Futures_and_Options_Exchange#cite_ref-0http://people.forbes.com/profile/brian-williamson/41845http://people.forbes.com/profile/brian-williamson/41845http://people.forbes.com/profile/brian-williamson/41845http://people.forbes.com/profile/brian-williamson/41845http://en.wikipedia.org/wiki/London_International_Financial_Futures_and_Options_Exchange#cite_ref-0http://en.wikipedia.org/wiki/Arbitragehttp://tradingpithistory.com/gallery/22/participants/liffe/