Is liquidity provision that informative? Evidence from commodity futures markets

Electronic trading allows traders to easily monitor markets and respond to changes in real time. This paper examines the dynamics of limit orders and their contribution to price discovery in CME corn, soybean, and wheat futures markets from January 2019 to June 2020. We find that 25% of limit orders submitted are filled, while around 70% are cancelled and 5% revised. Latency of order activity is low, with half of the limit orders being canceled within 3 seconds after their placement in all markets. Most market activity in terms of the number of contracts represents price-matching limit orders (around 90%), while the remaining 10% is composed by limit orders that either improve or worsen the market and by trades. We evaluate the contribution of these events to price discovery. Results suggest that limit orders that better or worsen the market have major roles in corn, soybean, and wheat market price discovery, while price-matching limit orders play a marginal role. The three types of limit orders jointly contribute more to efficient price variance than trades. Our results suggest that most limit orders in grain futures markets continue to play the traditional role of uninformed liquidity provision, which contrasts with previous research results that point at the market depth in these markets being highly relevant for price discovery.

Name thesis:degree_name

M.S.

Level thesis:degree_level

Thesis

Discipline thesis:degree_discipline

Agricultural & Applied Econ

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2022

Author dc:creator

• Ma, Richie Ruchuan

Contributors dc:contributor

• Serra, Teresa
• Garcia, Philip
• Irwin, Scott H

• Liquidity Provision
• Market Microstructure
• Price Discovery
• Commodity Futures Markets
• Limit Orders

Statement dc:rights

• Copyright 2022 Richie Ma

Language dc:language

en, eng

Handle dc:identifier

https://hdl.handle.net/2142/117658

OAI record oai:identifier

https://www.ideals.illinois.edu/oai-pmh?verb=GetRecord&metadataPrefix=etdms&identifier=oai%3Awww.ideals.illinois.edu%3A2142%2F117658