Modeling the Information Contained in the Limit Order Book

• Activity Number: 441
• Type: Contributed
• Date/Time: Tuesday, August 6, 2013 : 2:00 PM to 3:50 AM
• Sponsor: Business and Economic Statistics Section
• Author(s): Julieta Frank*+ and Luis Frank
• Companies: University of Manitoba and University of Buenos Aires
• Keywords: agricultural futures ; limit order book ; electronic trading ; liquidity costs

Abstract

Commodity trading in the futures exchange may take place under two different trading systems, one relying on a market maker in charge of providing firm bid and ask quotes and the other based on an electronic order book maintained by the exchange which contains all the prices and corresponding volumes at which traders are willing to make a transaction. Most of the research in agricultural futures markets has been limited to market maker systems, and in particular, to the study of the prevailing bid and ask quotes. Agricultural futures trading has shifted from the conventional market maker system to the computerized order book system. However, little research exists on trading in agricultural markets on order book systems because, unlike financial markets, computerized trading of agricultural commodities was not widely used until recently. The information contained in the order book beyond the prevailing bid and ask quotes may be used to obtain improved estimates of liquidity costs faced by market participants. The overall purpose of the research is to study the incremental information content of the order book over the information traditionally available in market maker markets.