Futures Market Liquidity During the Financial Crisis

Abstract

This paper examines how liquidity in two actively traded futures markets was affected by the recent financial crisis. Changes to trading volumes, spreads, the level and shape of order books, and the price impact of a trade document a tremendous withdrawal of liquidity from Eurodollar futures markets, yet a far more muted response in the S&P 500 index futures contract. A deeper investigation into high-frequency trading strategies finds that prior to the crisis, liquidity additions and withdrawals rapidly restored symmetry to the electronic limit order book in both Eurodollar and S&P 500 futures markets. After the crisis began, these strategies changed in the two markets in opposite ways, with patterns consistent with aggressive liquidity traders more likely to wait on the sidelines in Eurodollar markets, yet maintain or enhance their activity in equity futures. Investigation of liquidity across 14 additional futures contracts suggests that the degree to which liquidity was affected by the crisis was related to the different clienteles that serve as the typical marginal provider of liquidity.

Keywords: liquidity, financial crisis, futures markets

JEL Classification: G14, G13