Why do the LIFFE and DTB bund futures contracts trade at different prices?

The German Bund futures contract is the most important bond futures contract in Europe. It is also unusual in that it trades on competing Exchanges - LIFFE in London and the DTB in Frankfurt. This paper looks at a surprising aspect of this dually traded contract, namely that the contract trades slightly more expensively (1.5 basis points) in LIFFE than in the DTB. LIFFE argue that this price difference helps make their contract more attractive. The paper investigates three possible explanations for the price difference. First, the calculation of price factors (conversion factors that make bonds in the basket of deliverables more comparable) differs slightly between Exchanges. Second, the DTB contract carries on trading for one day longer than the LIFFE one giving the short one more days to choose which bund in the basket to deliver (the so-called quality option) and so makes the contract slightly less valuable to the trader with a long position. Third, the penalty for late delivery is harsher on LIFFE than on the DTB and so investors fearing a short squeeze (where investors that are supposed to deliver the underlying bunds cannot acquire them) will be more nervous of holding a LIFFE contract than a DTB one. It concludes that none of these factors are important enough to explain the observed price difference and so it is hard to explain why the price difference occurs.