Is liquidity provision informative? Evidence from agricultural futures markets

Abstract

Electronic commodity trading witnesses a massive volume of order messages every trading day, but little is known about their informativeness. We examine limit order dynamics and their role in price discovery in the Chicago Mercantile Exchange (CME) corn, soybean, and wheat futures markets from January 2019 to June 2020, using order-level data. Between 75% and 79% of the large number of limit orders submitted are then deleted, which contrasts with the much smaller proportion getting executed or revised. Aggressive trades and limit orders substantially contribute to price discovery, whereas nonaggressive trades and limit orders, representing most market events, play a minor role. Following public information releases, there is a shift in trading strategies, with trades contributing more to price discovery and aggressive limit orders contributing less, compared to nonrelease days. Our findings suggest that most limit orders in agricultural futures markets continue to play the traditional role of uninformed liquidity provision.