The Third Dimension of Financialization: Electronification, Intraday Institutional Trading, and Commodity Market Quality
60 Pages Posted: 10 Nov 2017 Last revised: 19 Oct 2023
Date Written: October 19, 2023
Abstract
We provide the first detailed empirical evidence on the financialization of intraday trading activity in the world’s largest commodity market, and show that this development was associated with first-order improvements in market quality. We use a unique U.S. regulatory dataset to show that the electronification of crude oil futures trading brought about a huge growth in intraday activity by institutional financial traders. We link this increased activity to statistically and economically significant improvements in bid-ask spreads, market depth, and short-term price efficiency. Our inferences are robust to concomitant changes in the nature and volume of customer trading. Finally, we document notable differences between the contributions of high-frequency traders (HFTs) vs. other intraday institutional financial traders to different market quality attributes.
Keywords: Financialization of commodities, Institutional trading, Intraday activity, Market Quality, HFT.
JEL Classification: G10, G23, Q02, G14, G12, G13
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