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Abstract:
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Traders in futures markets operate by submitting limit buy or sell orders to the exchange, where a centralized computer system places them in the limit order book (LOB). Incoming orders updating the LOB can be generated by a computer algorithm or by a human trader. Algorithmic orders are generally used to trade large quantities gradually over time with the objective of minimizing market impact and trading costs. Such orders can access the market at a speed and frequency that would be impossible for a human trader to perform. However, the impact of algorithmic orders on market quality has been little explored. We analyze the role of algorithmic trading on market quality focusing on market liquidity. Specifically, we examine agricultural futures markets. Studies on algorithmic trading are scarce, mainly due to the unavailability of data identifying the orders that were generated by an algorithm. To the best of our knowledge no research has been performed in algorithmic trading for agricultural commodities.
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