IDEAS home Printed from https://ideas.repec.org/a/bla/agecon/v52y2021i4p679-699.html
   My bibliography  Save this article

Looking under the surface: An analysis of iceberg orders in the U.S. agricultural futures markets

Author

Listed:
  • Quanbiao Shang
  • Teresa Serra
  • Philip Garcia
  • Mindy Mallory

Abstract

Like many exchanges the Chicago Mercantile Exchange allows traders to conceal part of their limit orders, known as a hidden‐limit order (HLO) or iceberg order. With HLOs, market participants have incomplete knowledge of the order book. To assess the effect of this lack of transparency in a period of highly volatile markets, we investigate the patterns and market impacts of HLOs in the U.S. corn and live cattle futures markets. Our conservative estimates indicate that HLOs represent more than 10% (20%) of the total volume in corn (live cattle) futures market. The findings show that the existence of HLOs improves market quality in multiple dimensions: driving trading volume while reducing market volatility and enhancing market liquidity. Our results are critical for regulators and exchanges as they are supportive of a degree of opacity. They are also indicative that market traders hide successfully, which can protect traders who have speed disadvantages in the era of fast trading.

Suggested Citation

  • Quanbiao Shang & Teresa Serra & Philip Garcia & Mindy Mallory, 2021. "Looking under the surface: An analysis of iceberg orders in the U.S. agricultural futures markets," Agricultural Economics, International Association of Agricultural Economists, vol. 52(4), pages 679-699, July.
    • Handle: RePEc:bla:agecon:v:52:y:2021:i:4:p:679-699
    DOI: 10.1111/agec.12642
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/agec.12642
    Download Restriction: no
    File URL: https://libkey.io/10.1111/agec.12642?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Zhepeng Hu & Mindy Mallory & Teresa Serra & Philip Garcia, 2020. "Measuring price discovery between nearby and deferred contracts in storable and nonstorable commodity futures markets," Agricultural Economics, International Association of Agricultural Economists, vol. 51(6), pages 825-840, November.
    2. Irwin, Scott H. & Sanders, Dwight R., 2012. "Financialization and Structural Change in Commodity Futures Markets," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 44(3), pages 371-396, August.
    3. Tarun Chordia & Richard Roll & Avanidhar Subrahmanyam, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, April.
    4. Moinas, Sophie, 2010. "Hidden Limit Orders and Liquidity in Order Driven Markets," IDEI Working Papers 600, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. Aaron Smith, 2005. "Partially overlapping time series: a new model for volatility dynamics in commodity futures," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 405-422.
    6. Stoll, Hans R, 1978. "The Supply of Dealer Services in Securities Markets," Journal of Finance, American Finance Association, vol. 33(4), pages 1133-1151, September.
    7. Newey, Whitney K & West, Kenneth D, 1987. "Hypothesis Testing with Efficient Method of Moments Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 777-787, October.
    8. Rudy De Winne & Catherine D'hondt, 2007. "Hide-and-Seek in the Market: Placing and Detecting Hidden Orders," Review of Finance, European Finance Association, vol. 11(4), pages 663-692.
    9. Degryse, Hans, 1999. "The total cost of trading Belgian shares: Brussels versus London," Journal of Banking & Finance, Elsevier, vol. 23(9), pages 1331-1355, September.
    10. Quanbiao Shang & Mindy Mallory & Philip Garcia, 2018. "The components of the bid†ask spread: Evidence from the corn futures market," Agricultural Economics, International Association of Agricultural Economists, vol. 49(3), pages 381-393, May.
    11. Mehdi Arzandeh & Julieta Frank, 2019. "Price Discovery in Agricultural Futures Markets: Should We Look beyond the Best Bid-Ask Spread?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(5), pages 1482-1498.
    12. Anand, Amber & Chakravarty, Sugato & Martell, Terrence, 2005. "Empirical evidence on the evolution of liquidity: Choice of market versus limit orders by informed and uninformed traders," Journal of Financial Markets, Elsevier, vol. 8(3), pages 288-308, August.
    13. Good, Darrel L. & Irwin, Scott H. & Isengildina, Olga, 2006. "The Value of USDA Situation and Outlook Information in Hog and Cattle Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(2), pages 1-21, August.
    14. Anabelle Couleau & Teresa Serra & Philip Garcia, 2020. "Are Corn Futures Prices Getting “Jumpy”?," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(2), pages 569-588, March.
    15. Stefan Frey & Patrik Sandås, 2017. "The Impact of Iceberg Orders in Limit Order Books," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(03), pages 1-43, September.
    16. Michael K Adjemian & Scott H Irwin, 2018. "USDA Announcement Effects in Real-Time," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(4), pages 1151-1171.
    17. 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.
    18. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. "Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, vol. 49(1), pages 153-181, March.
    19. Hautsch, Nikolaus & Huang, Ruihong, 2012. "On the dark side of the market: Identifying and analyzing hidden order placements," CFS Working Paper Series 2012/04, Center for Financial Studies (CFS).
    20. Kishore Joseph & Philip Garcia, 2018. "Intraday market effects in electronic soybean futures market during non-trading and trading hour announcements," Applied Economics, Taylor & Francis Journals, vol. 50(11), pages 1188-1202, March.
    21. Angel Pardo & Roberto Pascual, 2012. "On the hidden side of liquidity," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 949-967, November.
    22. Andersen, Torben G. & Bollerslev, Tim, 1997. "Intraday periodicity and volatility persistence in financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 115-158, June.
    23. Kovaleva, Polina & Iori, Giulia, 2015. "The impact of reduced pre-trade transparency regimes on market quality," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 145-162.
    24. Georg V. Lehecka & Xiaoyang Wang & Philip Garcia, 2014. "Gone in Ten Minutes: Intraday Evidence of Announcement Effects in the Electronic Corn Futures Market," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 36(3), pages 504-526.
    25. Mehdi Arzandeh & Julieta Frank, 2019. "Price Discovery in Agricultural Futures Markets: Should We Look beyond the Best Bid‐Ask Spread?," American Journal of Agricultural Economics, John Wiley & Sons, vol. 101(5), pages 1482-1498, October.
    26. Ho, Thomas S Y & Stoll, Hans R, 1983. "The Dynamics of Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 38(4), pages 1053-1074, September.
    27. Alex Boulatov & Thomas J. George, 2013. "Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 2096-2137.
    28. Bessembinder, Hendrik & Panayides, Marios & Venkataraman, Kumar, 2009. "Hidden liquidity: An analysis of order exposure strategies in electronic stock markets," Journal of Financial Economics, Elsevier, vol. 94(3), pages 361-383, December.
    29. Esser, Angelika & Monch, Burkart, 2007. "The navigation of an iceberg: The optimal use of hidden orders," Finance Research Letters, Elsevier, vol. 4(2), pages 68-81, June.
    30. Blume, Marshall E & Goldstein, Michael A, 1997. "Quotes, Order Flow, and Price Discovery," Journal of Finance, American Finance Association, vol. 52(1), pages 221-244, March.
    31. Aaron Smith, 2005. "Partially overlapping time series: a new model for volatility dynamics in commodity futures," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 405-422, March.
    32. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2015. "Hidden Liquidity: Some New Light on Dark Trading," Journal of Finance, American Finance Association, vol. 70(5), pages 2227-2274, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xinyue He & Teresa Serra & Philip Garcia, 2021. "Resilience in “Flash Events” in the Corn and Lean Hog Futures Markets," American Journal of Agricultural Economics, John Wiley & Sons, vol. 103(2), pages 743-764, March.
    2. Stefan Frey & Patrik Sandås, 2017. "The Impact of Iceberg Orders in Limit Order Books," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(03), pages 1-43, September.
    3. Degryse, Hans & Karagiannis, Nikolaos & Tombeur, Geoffrey & Wuyts, Gunther, 2021. "Two shades of opacity: Hidden orders and dark trading," Journal of Financial Intermediation, Elsevier, vol. 47(C).
    4. Frey, Stefan & Sandås, Patrik, 2009. "The impact of iceberg orders in limit order books," CFR Working Papers 09-06, University of Cologne, Centre for Financial Research (CFR).
    5. Cox, Justin S., 2022. "The impact of reporting changes on hidden liquidity: Evidence from the Chicago stock exchange," Global Finance Journal, Elsevier, vol. 53(C).
    6. Moinas, Sophie, 2010. "Hidden Limit Orders and Liquidity in Order Driven Markets," TSE Working Papers 10-147, Toulouse School of Economics (TSE).
    7. 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.
    8. Thomas A. P. de Boer & Cornelis Gardebroek & Joost M. E. Pennings & Andres Trujillo‐Barrera, 2022. "Intraday liquidity in soybean complex futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1189-1211, July.
    9. Chen, Yuanyuan & Gao, Xuefeng & Li, Duan, 2018. "Optimal order execution using hidden orders," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 89-116.
    10. Gozluklu, Arie E., 2016. "Pre-trade transparency and informed trading: Experimental evidence on undisclosed orders," Journal of Financial Markets, Elsevier, vol. 28(C), pages 91-115.
    11. Egginton, Jared F. & McBrayer, Garrett A. & Watson, Ethan D., 2023. "Shades of trade: Dark trading and price efficiency," Journal of Banking & Finance, Elsevier, vol. 155(C).
    12. Nikolaus Hautsch & Ruihong Huang, 2012. "On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements," SFB 649 Discussion Papers SFB649DP2012-014, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    13. Indriawan, Ivan & Martinez, Valeria & Tse, Yiuman, 2021. "The impact of the change in USDA announcement release procedures on agricultural commodity futures," Journal of Commodity Markets, Elsevier, vol. 23(C).
    14. Baruch, Shmuel & Panayides, Marios & Venkataraman, Kumar, 2017. "Informed trading and price discovery before corporate events," Journal of Financial Economics, Elsevier, vol. 125(3), pages 561-588.
    15. Zhou, Xinquan & Bagnarosa, Guillaume & Gohin, Alexandre & Pennings, Joost M.E. & Debie, Philippe, 2023. "Microstructure and high-frequency price discovery in the soybean complex," Journal of Commodity Markets, Elsevier, vol. 30(C).
    16. Attig, Najah & El Ghoul, Sadok, 2021. "Flying under the radar: The real effects of anonymous trading," Journal of Corporate Finance, Elsevier, vol. 71(C).
    17. Bessembinder, Hendrik & Panayides, Marios & Venkataraman, Kumar, 2009. "Hidden liquidity: An analysis of order exposure strategies in electronic stock markets," Journal of Financial Economics, Elsevier, vol. 94(3), pages 361-383, December.
    18. Lee, Albert J. & Chung, Kee H., 2022. "Hidden liquidity, market quality, and order submission strategies," Journal of Financial Markets, Elsevier, vol. 61(C).
    19. Arzandeh, Mehdi & Frank, Julieta, 2017. "The Information Content of the Limit Order Book," 7th Annual Canadian Agri-Food Policy Conference, January 11-13, 2017, Ottawa, ON 253251, Canadian Agricultural Economics Society.
    20. Kovaleva, Polina & Iori, Giulia, 2015. "The impact of reduced pre-trade transparency regimes on market quality," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 145-162.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:agecon:v:52:y:2021:i:4:p:679-699. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/iaaeeea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.