Market Makers and Liquidity Premium in Electricity Futures Markets

Are behavioral biases prevalent in commodities and futures markets? Although retail equity investors display many psychological biases, investors who are more sophisticated exhibit fewer biases. The market makers, traders (locals), speculators, hedgers, and institutions of the commodities and futures markets tend to be professional participants, and thus less prone to behavioral biases. Nevertheless, the fast-paced action of these markets is an environment that fosters behavioral errors. This chapter reviews the literature on the pervasiveness of prospect theory behavior and other biases in these markets. Strong evidence indicates that market participants exhibit loss aversion, the impact of reference points, the disposition effect, and overconfidence. They also engage in positive feedback trading and momentum investing. Lastly, the chapter reviews risk-taking and behavioral biases by the type of market participant, particularly focusing on market makers, floor traders, clearing members, and the public.

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Destabilizing momentum trading and counterbalancing contrarian strategy by large trader groups

Review of Accounting and Finance ◽

10.1108/raf-03-2019-0054 ◽

2019 ◽

Vol 19 (1) ◽

pp. 83-106

Author(s):

Jang Hyung Cho ◽

Robert Daigler ◽

YoungHa Ki ◽

Janis Zaima

Keyword(s):

Futures Markets ◽

Trading Strategies ◽

Institutional Trading ◽

Momentum Strategy ◽

Content Type ◽

Contrarian Strategy ◽

Market Makers ◽

Contrarian Strategies ◽

Momentum Trading ◽

Individual Traders

Purpose The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets. Design/methodology/approach The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility. Findings Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders. Originality/value This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.

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The role of market makers in the Euronext milling wheat contract

Agricultural Economics (Zemědělská ekonomika) ◽

10.17221/65/2013-agricecon ◽

2014 ◽

Vol 60 (No. 4) ◽

pp. 183-187

Author(s):

M. Ziegelbaeck ◽

G. Breuer

Keyword(s):

Transaction Costs ◽

Futures Markets ◽

Commodity Futures ◽

Market Prices ◽

Market Makers ◽

Market Participants ◽

Bid Ask Spread ◽

Commodity Futures Markets

The knowledge of transaction costs is important for market participants. Profits accrued while dealing in e.g. commodity futures do not just depend on the development of the futures or the underlying commodity, but on the transaction costs as well. In the commodity futures markets, transaction costs – usually addressed as the bid/ask spread – are influenced if not set by the market makers (liquidity providers) and other intermediaries that broker the contracts. This paper tests the assumption that liquidity providers have the ability to shift prices, and this ability is negatively correlated with the degree of competition. Using Roll’s measure (1984) to estimate the bid/ask spread, the authors can show that liquidity providers do have an influence on prices. To put this result into context, the margin for market makers is calculated on the basis of transactions in wheat-futures at the Euronext Paris that took place in May 2012, ranges between 0.0047% and 0.0055%. It is within this margin that market-makers could influence market prices of the wheat contract.  

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