Depth and Tightness

Abstract

We analyze futures market liquidity using audit trail data that allows for direct calculation of market attributes such as depth, spread and spread-free volatility. Depth is relatively stable throughout the trading day, in particular contrast to customer spreads, which are much higher at open and close, consistent with equity market evidence. Interestingly, spreads are larger at market close even for futures with substantial reductions in price volatility throughout the day. We present evidence consistent with the view that market power and inventory considerations are responsible for increased closing spreads.

JEL Classification: G13