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Bid-ask spreads in commodity futures markets

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  • Henry Bryant
  • Michael Haigh

Abstract

Issues of recent interest and controversy regarding bid-ask spreads in commodity futures markets are investigated. First, competing spread estimators are applied to open outcry transactions data and resulting estimates are compared to observed spreads. This enables market microstructure researchers, regulators, exchange officials, and traders the opportunity to evaluate the usefulness and accuracy of bid-ask estimators in markets that do not report bid and ask data, providing an idea of the 'worst-case' transaction costs that are likely to be incurred. Also compared, are spreads observed before and after trading was automated (and made anonymous) on commodity futures markets, and it is discovered that spreads have generally widened since trading was automated, and that they have an increased tendency to widen in periods of high volatility. These findings suggest that commodity futures markets have an inherently different character than financial futures markets, and therefore merit separate investigation.

Suggested Citation

  • Henry Bryant & Michael Haigh, 2004. "Bid-ask spreads in commodity futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 14(13), pages 923-936.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:13:p:923-936
    DOI: 10.1080/0960310042000284669
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    2. Takuji Matsumoto & Yuji Yamada, 2023. "Improving the Efficiency of Hedge Trading Using Higher-Order Standardized Weather Derivatives for Wind Power," Energies, MDPI, vol. 16(7), pages 1-22, March.
    3. Shah, Samarth & Brorsen, B. Wade & Anderson, Kim B., 2012. "Effective Bid-Ask Spreads in Futures versus Futures Options," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(3), pages 1-14.
    4. Julieta Frank & Philip Garcia, 2011. "Measuring the cost of liquidity in agricultural futures markets: Conventional and Bayesian approaches," Agricultural Economics, International Association of Agricultural Economists, vol. 42, pages 131-140, November.
    5. Xiaoyang Wang & Philip Garcia & Scott H. Irwin, 2014. "The Behavior of Bid-Ask Spreads in the Electronically-Traded Corn Futures Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 96(2), pages 557-577.
    6. Julieta Frank & Philip Garcia, 2010. "Bid-Ask Spreads, Volume, and Volatility: Evidence from Livestock Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(1), pages 209-225.
    7. Mizrach, Bruce & Otsubo, Yoichi, 2014. "The market microstructure of the European climate exchange," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 107-116.
    8. Nicola Secomandi & Sunder Kekre, 2014. "Optimal Energy Procurement in Spot and Forward Markets," Manufacturing & Service Operations Management, INFORMS, vol. 16(2), pages 270-282, May.
    9. Timotheos Angelidis & Alexandros Benos, 2009. "The Components of the Bid‐Ask Spread: the Case of the Athens Stock Exchange," European Financial Management, European Financial Management Association, vol. 15(1), pages 112-144, January.
    10. Ikeda, Shin S., 2019. "Illiquidity in the Japan electric power exchange," Journal of Commodity Markets, Elsevier, vol. 14(C), pages 16-39.
    11. John M. Fry & Baoying Lai & Mark Rhodes, 2011. "The interdependence of Coffee spot and futures market," Working Papers 2011.1, International Network for Economic Research - INFER.
    12. Samarth Shah & B. Wade Brorsen, 2013. "Are liquidity costs higher in options markets or in futures markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(8), pages 701-708, April.
    13. Janzen, Joseph P. & Carter, Colin A. & Smith, Aaron D., 2012. "The Quality of Price Discovery and the Transition to Electronic Trade: The Case of Cotton Futures," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124994, Agricultural and Applied Economics Association.
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    15. Li, Miao & Xiong, Tao, 2023. "Is China's new live hog futures market efficient? Evidence from an analysis of market quality, price discovery and hedging effectiveness," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 68(01), September.
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