The order flow cost of index rolling in commodity futures markets

Abstract

Commodity index rolling is treated as a natural experiment and an event study of order flow costs in a wide array of futures markets is conducted. The spread between nearby and deferred futures prices decreases significantly in the early and growth phases of financialization (1991–2011), with the spreads reversing back after rolling is completed. Spread impacts disappear in the post-financialization period (2012–2019). We argue that a dramatic increase in the supply of liquidity brought on by the transition to electronic trading in commodity futures markets is primarily responsible for the decline of roll order flow costs.