Algorithmic quoting, trading, and market quality in agricultural commodity futures markets

Zhepeng Hu, Teresa Serra and Philip Garcia

Applied Economics, 2020, vol. 52, issue 58, 6277-6291

Abstract: This paper investigates the effect of algorithmic trading activity, as measured by quoting, on the corn, soybean, and live cattle commodity futures market quality. Using the CME’s limit-order-book data and a heteroscedasticity-based identification approach, we find more intensive algorithmic quoting (AQ) is beneficial to multiple dimensions of market quality. AQ improves pricing efficiency and mitigates short-term volatility, but its effects on liquidity costs are somewhat mixed. Increased AQ significantly narrows effective spreads in the corn and soybean markets, but not in the less traded live cattle futures market. The narrowing in effective spreads emerges from a reduction in adverse selection costs as more informed traders lose their market advantage. There also is evidence that liquidity provider revenues increase with heightened AQ activity in the corn futures market, albeit the effect is not statistically significant in the soybean and live cattle futures markets. The increased revenue points to a tradeoff between the dimensions of market quality, and the need for continued assessment and monitoring of algorithmic trading activity.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2020.1789060 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:52:y:2020:i:58:p:6277-6291

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2020.1789060

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().