Commodity Markets Intervention: Consequences of Speculation, and Informed Trading

Abstract

The Chinese regulatory authority’s interventions into the futures market for steel during 2016 provide a rare opportunity to study the unintended consequences of interventions. Although hot rolled coil (HRC) and rebar are products with nearly identical components, their futures contracts trade separately. The regulatory authority intervened into the futures market for rebar but refrained from doing so for HRC. We document impacts of interventions measured by increased volatility, trading volume, and spreads in rebar markets. There is also evidence of informed trading in both markets, reflected by abnormally high trading volumes and low open interests occurring the day before the announcement of interventions.

Keywords: Government intervention; speculation; informed trading; market microstructure; steel futures market.

JEL Classification: G12, G14