The role of market makers in the Euronext milling wheat contract

Martin Ziegelbaeck and Guenther Breuer
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Martin Ziegelbaeck: University of Natural Resources and Life Sciences - BOKU, Vienna, Austria
Guenther Breuer: University of Natural Resources and Life Sciences - BOKU, Vienna, Austria

Agricultural Economics, 2014, vol. 60, issue 4, 183-187

Abstract: The knowledge of transaction costs is important for market participants. Profits accrued while dealing in e.g. commodity futures do not just depend on the development of the futures or the underlying commodity, but on the transaction costs as well. In the commodity futures markets, transaction costs - usually addressed as the bid/ask spread - are influenced if not set by the market makers (liquidity providers) and other intermediaries that broker the contracts. This paper tests the assumption that liquidity providers have the ability to shift prices, and this ability is negatively correlated with the degree of competition. Using Roll's measure (1984) to estimate the bid/ask spread, the authors can show that liquidity providers do have an influence on prices. To put this result into context, the margin for market makers is calculated on the basis of transactions in wheat-futures at the Euronext Paris that took place in May 2012, ranges between 0.0047% and 0.0055%. It is within this margin that market-makers could influence market prices of the wheat contract.

Keywords: market maker; milling wheat futures; roll's measure; transactions costs (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:caa:jnlage:v:60:y:2014:i:4:id:65-2013-agricecon

DOI: 10.17221/65/2013-AGRICECON

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