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Order book price impact in the Chinese soybean futures market

Journal: International Journal of Finance & Economics

Date: 2023

Author: Muzhao Jin, Fearghal Kearney, Youwei Li, Yung Chiang Yang

Abstract:
We study the price impact of order flow in the world's largest soybean meal futures markets. Our intraday results indicate that incoming orders can be used to explain and predict future price changes. Our results are shown to be robust to various order flow measures, price aggregation approaches and data frequencies. We find that order flow imbalance (OFI) is a more all-encompassing measure carrying greater information about price change relative to both trade imbalance (TI) and volume. Moreover, while both OFI and TI are shown to predict future price changes, this predictability diminishes over longer measure and price change frequency horizons.

Link: Google Scholar

Background and Context

Market Significance

China's soybean meal futures market is the largest in the world and represents the country's largest agricultural futures market by trading volume.

Market Structure

Trading operates through an electronic market where demand and supply are represented by limit orders in the order book, with trades occurring when buy/sell orders match.

Research Approach

The study analyzes intraday order flow data from 2008-2013 using three key measures: order flow imbalance (OFI), trade imbalance (TI), and trading volume.

Strong Impact of Order Flow Imbalance on Price Changes

  • OFI shows the strongest relationship with price changes, with 97.87% significant coefficients
  • Trade imbalance and volume also show significant relationships but with lower percentages
  • Demonstrates OFI as the most comprehensive measure of order flow

Market Depth's Influence on Price Impact

  • Market depth has a significant inverse relationship with price impact
  • The relationship strengthens over longer time horizons
  • Shows prices are more resilient to incoming orders than indicated by market depth alone

Predictive Power of Order Flow Measures

  • OFI has significant predictive power for up to 90 seconds into the future
  • Positive impact in first 20 seconds, followed by direction adjustment
  • Shows temporary nature of order flow's price impact

Intraday Trading Pattern of Order Flow Measures

  • Trading activity shows a U-shaped pattern throughout the trading day
  • Higher activity at market open and close
  • Demonstrates consistent patterns in order flow and price changes

Market Participant Impact on Trading

  • Market dominated by individual investors (97%)
  • Institutional investors represent only 3% of participants
  • Indicates high speculative trading activity

Contribution and Implications

  • First comprehensive study of order flow price impact in Chinese agricultural futures markets
  • Demonstrates OFI as superior measure for analyzing price formation and market efficiency
  • Provides practical insights for investors and regulators in emerging markets

Data Sources

  • Impact Chart: Based on Table 3 showing regression results of price changes and order flow measures
  • Depth Chart: Constructed from Table 4 showing relation between price impact and market depth
  • Predictive Chart: Derived from Table 8 showing the lifespan of order flow price impact
  • Intraday Chart: Based on Figure 1 showing average 15-minute price changes and order flow patterns
  • Participant Chart: Data from Shanghai Futures Exchange development report cited in the paper