Trading and Information in Futures Markets

Abstract

This paper studies the trading behavior of different types of traders in commodity futures and their impact on liquidity consumption/provision as well as price discovery in the market. CME classifies each trade by its Customer Type Indicator (CTI) into four groups: a local trader who trades for his own account (CTI1), a commercial clearing member for his proprietary accounts (CTI2), an exchange member for his own account though a local trader (CTI3), and the general public (non-members) (CTI4). We find that non-members (CTI4) consume most of the short-term (intraday) liquidity while local traders as market makers are its main provider. Such a liquidity provision yields a substantial Sharpe ratio for the latter and constitutes most of the intraday volume. Most of the interday trading and position taking come from groups CTI2 and CTI3, reflecting their longer term needs for hedging and speculation. We also find that the imbalance in demand and supply in the market can explain a significant part of the daily price movements. In addition, changes in the overnight positions of the general public and clearing members contribute mostly to daily price changes. Moreover, we find that daily changes in the positions of CTI3 group can forecast future price movements, reflecting possible information advantage they may possess.

Keywords: futures markets, CTI, liquidity, price discovery

JEL Classification: G10, G12, G13, G14, G18