An empirical analysis of the supply of liquidity by locals in futures markets: Evidence from the Sydney Futures Exchange

Contrary to the received view of market makers in theoretical literature, this study provides direct evidence that locals on the Sydney Futures Exchange (SFE) do not trade exclusively as passive market participants. In fact, rather than act purely as market makers, locals as a group are almost as likely to demand as supply liquidity. Further, locals trading on the floor of the SFE are less likely to supply liquidity when bid-ask spreads, trading frequency and price volatility are high, as well as around information announcements. These findings are consistent with aggressive trading by locals on the basis of a short-lived information advantage. This study also documents considerable diversity in the propensity of locals to supply liquidity, finding that it is related to the quantity, frequency and average size of their trading activity.