Could Market Making Be Profitable in the European Carbon Market?

37 Pages Posted: 18 Jun 2018

See all articles by Emilios C. Galariotis

Emilios C. Galariotis

Audencia Business School ; Audencia Nantes School of Management

Iordanis Kalaitzoglou

Audencia Nantes School of Management

Kyriaki Kosmidou

Aristotle University of Thessaloniki - Department of Economics

Spiros Papaefthimiou

Technical University of Crete (TUC) - School of Production Engineering and Management

Spyros I. Spyrou

Athens University of Economics and Business - Department of Accounting and Finance

Date Written: June 18, 2018

Abstract

We investigate when market making can be profitable in the European Carbon Futures market, by developing an order type selection rule, based solely on transaction level data. We employ a granular approach that uses an observable variable, i.e. trading intensity, to extract the liquidity and information price components and we investigate their impact on spreads, volatility and ultimately on the profitability of different order types. We find that market orders are always less profitable than limit orders. In addition, market makers are expected to derive most of their profits in a low trading intensity environment, mainly due to higher liquidity commissions and a lower probability of dealing with better informed agents. In contrast, an unconditional limit order submission strategy from an off-floor trader should not be preferred, apart from a medium trading intensity environment, where information and liquidity premia adequately compensate them for execution and information risk.

Keywords: EUA Futures, UHF Trading, Intraday Price Discovery, Market Making

JEL Classification: C30, C41, G14

Suggested Citation

Galariotis, Emilios C. and Kalaitzoglou, Iordanis and Kosmidou, Kyriaki and Papaefthimiou, Spiros and Spyrou, Spyros I., Could Market Making Be Profitable in the European Carbon Market? (June 18, 2018). USAEE Working Paper, Available at SSRN: https://ssrn.com/abstract=3198422 or http://dx.doi.org/10.2139/ssrn.3198422

Emilios C. Galariotis

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Audencia Nantes School of Management ( email )

France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Iordanis Kalaitzoglou (Contact Author)

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Kyriaki Kosmidou

Aristotle University of Thessaloniki - Department of Economics ( email )

Thessaloniki, 54006
Greece

Spiros Papaefthimiou

Technical University of Crete (TUC) - School of Production Engineering and Management ( email )

University Campus
Chania
Crete, 73100
Greece

Spyros I. Spyrou

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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