Liquidity and Market Quality Around Predictable Trades: Evidence from Crude Oil ETF Rolls
University of Utah - Department of Finance
Laura A. Tuttle
U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis
Southern Methodist University (SMU) - Edwin L. Cox School of Business
November 6, 2014
We extend the theory of strategic trading around a predictable liquidation to show that such benefits rather than harms the liquidator if the market is “resilient” in the sense that trades’ temporary price impacts are quickly reversed. We provide related empirical evidence by studying prices, liquidity, and individual account trading activity around the large and predictable “roll” trades undertaken by the largest ETF tracking crude oil futures prices. The evidence indicates narrower bid-ask spreads, greater order book depth, improved market resiliency, and that more trading accounts provide liquidity on roll dates. However, the large volume of trading associated with the roll transactions leads to substantial trade execution costs that average three percent per year. On balance, the theory and evidence indicates that other traders effectively provide liquidity to rather than exploit predictable trades in resilient markets.
Number of Pages in PDF File: 57
Keywords: predatory trading, sunshine trading, trading costs, resiliency, ETFs, crude oil, energy, commodities, futures
JEL Classification: G1, G2working papers series
Date posted: March 23, 2012 ; Last revised: November 7, 2014
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