Maximum order size and market quality: Evidence from a natural experiment in commodity futures markets

Abstract

We exploit a 2018 exchange-mandated increase of the maximum order size in some—but, crucially, not all—US agricultural futures markets, to link exogenous constraints on order placement and execution, price volatility, and market liquidity. The old maximum size of 2500 contracts was binding: demand exists for placing and executing much larger orders. Limit-order book depth at the best bid and ask increases dramatically after the exchange quadruples the maximum order size. Amid relatively stable volatility, bid-ask spreads narrow, and the price impact of large trades falls. In sum, we find that market quality can improve after an increase in maximum order and trade size.