Is the corn futures market noisier? The impact of high frequency quoting

Research output: Contribution to journalArticlepeer-review

Abstract

The paper pioneers research on high frequency (HF) quoting noise in electronically traded agricultural futures markets. HF quoting–quickly cancelling posted limit orders and replacing them with new ones–emerges as a strategy for liquidity-providing traders. HF quoting can generate noise in price quotes which adds uncertainty to order execution and impairs the informational value of bid and ask prices. It can also lead to the perception that markets cannot be trusted for commercial transactions. Using intraday Best Bid Offer data for 2008–2013 and wavelet-based measures of volatility, we investigate the excess variance and co-movement discrepancies in the bid and ask prices. We find excess HF quoting variance exists. It is the highest at 250-ms scale–90% higher than the variance implied by a random walk–but declines quickly to 7% at the 32 s scale. But its economic magnitude is negligibly small. Bid and ask price co-movements show a low degree of discrepancy with average correlations at 0.67 at 250 ms and reaching 0.95 at 8 s. All measures indicate that HF quoting noise has declined through the period. Overall, HF quoting has not caused excess variance during the transition to electronic trading in the liquid corn futures market.

Original languageEnglish (US)
Pages (from-to)2730-2750
Number of pages21
JournalApplied Economics
Volume52
Issue number25
DOIs
StatePublished - May 27 2020

Keywords

  • Corn futures market
  • excess variance
  • high frequency quoting
  • wavelet variance

ASJC Scopus subject areas

  • Economics and Econometrics

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