Resilience in Flash Events in the Corn and Lean Hog Futures MarketsJEL codes

The Commodity Futures Trading Commission (CFTC) recently identified large intra-day price changes or flash events in continuously traded commodity futures markets. These flash events fueled discussion on whether futures markets are becoming less effective as human intervention is diminishing in favor of automated trading. Using intra-day data, we examine liquidity resilience during flash events in corn and lean hog futures markets from 2014 to 2019. Overall, we find little evidence that the liquidity provision in these two markets relative to normal days becomes fragile when large price movements occur. Our analysis suggests that flash events are heavily influenced by unanticipated changes in fundamentals that may lead to a new equilibrium price. Liquidity dynamics during these events supports the view that active market making helps absorb the increased volume and stabilize markets.

Automated summary

The study found that in the corn and lean hog futures markets, liquidity provision during large price movements did not become overly fragile, instead showing that market making helps absorb trading volume and stabilize markets.