Price impact of block trades: the curious case of downstairs trading in the EU emissions futures market

Abstract

Using high-frequency data from the European Climate Exchange (ECX), we examine the determinants of price impact of €21 billion worth of block trades during 2008-2011 in the European carbon market. We find that wider bid-ask spreads and volatility are characterised by smaller price impact. Larger levels of price impact are more likely to occur during the middle of the trading day, specifically the four-hour period between 11am and 3pm, than during the first or final hours. Purchase block trades induce relatively smaller price impact on price run-up, while sell block trades exhibit larger price impact on price run-up. We conclude that block trades on the ECX induce less price impact than in equity or conventional futures markets, and that a significant proportion of the effects contradict findings on block trades in those markets; thus, we provide the first evidence of the curious bent to block trading in the EU Emissions Trading Scheme (EU-ETS).

Liquidity and market efficiency in the world's largest carbon market

“…We further test this hypothesis in subsequent sections of this paper. Another interesting observation that serves to underscore this suggestion, as well as further cementing findings of other studies on the improving returns on the ECX (see for example Ibikunle et al, 2012), is the marked improvements in the returns from Year I to Year IV.…”

Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures

“…Ibikunle et al (2013) measure higher spreads and adverse selection costs in the opening period (7:00-9:00) and in closing hours (15:00-17:00) when market prices are noisier. In a related study, Ibikunle et al (2016) assess the impact of the informed traders' strategies on spreads and adverse selection costs: intense at the open and mild at the close, which can explain the Ushaped pattern of the spread. Building on this literature, we assume that time intervals capture the effects of informed trading and noise on spreads.…”

“…We therefore include three time intervals INTj as they were determined by Ibikunle et al (2016) into the below regression model:…”

“…Prior research on the EUA futures market provide evidence that the price impact of trades is non-linear in size (Frino et al, 2010;Ibikunle et al, 2013Ibikunle et al, , 2016. Palao and Pardo (2014) show that carbon traders tend to adjust their trades as a multiple of five contracts when uncertainty are higher and prices noisier.…”

“…Palao and Pardo (2014) show that carbon traders tend to adjust their trades as a multiple of five contracts when uncertainty are higher and prices noisier. Kalaitzoglou and Ibrahim (2013) and Ibikunle et al (2016) find that informed traders split large block orders (with a minimum size of 50 contracts)…”