Research

[3] Is liquidity provision informative? Evidence from agricultural futures markets

with Teresa Serra, American Journal of Agricultural Economics (field top 1, ABS ranking 3), January 2025

— Abstract: Electronic commodity trading witnesses a massive volume of order messages every trading day, but little is known about their informativeness. We examine limit order dynamics and their role in price discovery in the Chicago Mercantile Exchange (CME) corn, soybean, and wheat futures markets from January 2019 to June 2020, using order-level data. Between 75% and 79% of the large number of limit orders submitted are then deleted, which contrasts with the much smaller proportion getting executed or revised. Aggressive trades and limit orders substantially contribute to price discovery, whereas nonaggressive trades and limit orders, representing most market events, play a minor role. Following public information releases, there is a shift in trading strategies, with trades contributing more to price discovery and aggressive limit orders contributing less, compared to non-release days. Our findings suggest that most limit orders in agricultural futures markets continue to play the traditional role of uninformed liquidity provision.

— SSRN version; AFA version; Internet Appendix; Replication Codes; CME Data Cleaning Notes; AFA Poster; Slides

— Using the order book directly reconstructed by the Market by Order (MBO) data and also providing evidence on the revolution of price discovery during the public WASDE announcement, thus subsuming the results of my Master thesis at UIUC.

— Presentations: 2024 AFA Ph.D. Poster Session, 2023 NCCC-134, University of Illinois at Urbana-Champaign ACE Commercial Ag

— Awards: 2024 Peer-Reviewed Research Achievement, ACE Dept, UIUC.

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[2] The Russia-Saudi Arabia oil price war during the COVID-19 pandemic

with Tao Xiong and Yukun Bao, Energy Economics, October 2021

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[1] Price explosiveness in nonferrous metal futures markets

with Tao Xiong, Economic Modelling, January 2021

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[3] More is Better? Implied functionality in agricultural futures trading

with Teresa Serra

— Abstract: Chicago Mercantile Exchange (CME) employs implied functionality primarily to link single-contract (outright) and calendar spread markets, eliminating price inconsistencies between outright and spread markets, and to facilitate additional cross-market liquidity. We examine how implied functionality in CME corn and soybean futures markets affects market quality in outright markets, focusing on these contracts due to their higher proportion of implied liquidity and greater analytical tractability. Constructing a counterfactual that excludes implied liquidity, we find that implied liquidity is associated with reduced market-making revenue and heightened adverse selection risk for liquidity providers, while having minimal impact on liquidity takers. This study suggests that the common goal of preserving tight spread and deep depth may not be optimal in the context of agricultural futures trading.

[2] Tick size and price discovery: Futures-options evidence

with Teresa Serra

— Abstract: The tick size, representing the minimum price increment in a financial market, can influence pricing efficiency. We examine its role in price discovery between futures and options in the Chicago Mercantile Exchange corn and soybean markets. Futures markets have a tick size twice that of options, often resulting in one-tick quoted spreads. This limits traders’ ability to improve the best bid or offer price, reducing their capacity to incorporate information into the price. With less tick size constraint and despite thin and costly trading, we find that options are more informative than futures on average. Price-improving quotes from options traders enhance information impounded into prices, suggesting that an unconstrained tick size may enhance price discovery. Our study suggests that a “tight spread and deep depth” may not represent universally optimal market microstructure setting.

— SSRN version; Slides; AFA poster

— Subsuming my Ph.D. second-year paper.

— Presentations: Inter-Finance PhD Seminar; 2024 Market Microstructure Summer School; University of Illinois at Urbana-Champaign ACE FACS; 2025 AFA Ph.D. Poster Session; 2025 SWFA; 2025 MFA; 2025 NCCC-134

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[1] One-tick futures: Does tick size reduction better markets?

with Teresa Serra

— Abstract: This paper examines tick size reduction in the U.S. 2-year Treasury Note futures market around January 14, 2019. We employ a difference-in-differences regression with 5-, 10-, and ultra 10-year Treasury futures markets as control groups, and we generally find significantly improved market quality. Trading costs reduce for liquidity takers and the smaller tick size has limited ability to relax its binding constraint. Our mechanism analyses indicate that traders significantly withdraw less liquidity after undercutting in response to non-execution risks and when they react to snipping risks at the opposite side of undercutting orders. Moreover, we find traders do not shift to market orders to acquire immediacy. Conversely, significantly fewer trades after undercutting. The smaller tick size significantly changes the quoting behavior, where depths are dispersed through the new pricing grid, suggesting that traders can post price-improving quotes and limit orders are layered in a more granular pricing grid, with limit order size significantly becoming smaller. Last, trading volume does not significantly change, while more trades occur with smaller trade size. Pricing efficiency does not significantly change neither does price discovery. Our findings suggest that reducing the tick size in tick-constrained liquid futures market could be promising.

— Presentations: University of Illinois at Urbana-Champaign ACE FACS; 2024 NCCC-134

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