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Could Market Making be Profitable in The European Carbon Market?

Author

Listed:
  • Emilios Galariotis
  • Iordanis Kalaitzoglou
  • Kyriaki Kosmidou
  • Spiros Papaefthimiou
  • Spyros I. Spyrou

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.

Suggested Citation

  • Emilios Galariotis & Iordanis Kalaitzoglou & Kyriaki Kosmidou & Spiros Papaefthimiou & Spyros I. Spyrou, 2019. "Could Market Making be Profitable in The European Carbon Market?," The Energy Journal, , vol. 40(1_suppl), pages 5-28, June.
    • Handle: RePEc:sae:enejou:v:40:y:2019:i:1_suppl:p:5-28
    DOI: 10.5547/01956574.40.SI1.egal
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    References listed on IDEAS

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    1. Peterson, Mark & Sirri, Erik, 2002. "Order Submission Strategy and the Curious Case of Marketable Limit Orders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(2), pages 221-241, June.
    2. Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1035-1064.
    3. Bae, Kee-Hong & Jang, Hasung & Park, Kyung Suh, 2003. "Traders' choice between limit and market orders: evidence from NYSE stocks," Journal of Financial Markets, Elsevier, vol. 6(4), pages 517-538, August.
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