Maximum Order Size and Agricultural Futures Market Quality: Evidence from a Natural Experiment

Kun Peng, Zhepeng Hu and Michel Robe

No 316410, 2021 Conference from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: We exploit an exchange-mandated increase of the maximum order size, in the U.S. corn calendar spread market, in order to investigate the connection between exogenous constraints on order placement and execution, volatility, and liquidity. We show that the old maximum of 2,500 contracts was binding, and that demand exists for placing and executing much larger orders. The limit-order book depth (at the best bid and ask) increases dramatically after the exchange quadruples the maximum order size to 10,000 contracts. Intraday realized volatility is not statistically significantly different before and after the rule change. Amid increased market depth and stable volatility, we document that quoted and effective spreads both narrow significantly and that the price impact of large trades is smaller. In sum, market quality is higher after the maximum order size change.

Keywords: Marketing (search for similar items in EconPapers)
Date: 2021
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Working Paper: Maximum Order Size and Agricultural Futures Market Quality: Evidence from a Natural Experiment (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:nccc21:316410

DOI: 10.22004/ag.econ.316410

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