Does market quality benefit from internationalization? Evidence from Chinese commodity futures markets

Abstract

Internationalization is the primary way to facilitate the high-quality development of Chinese commodity futures markets. Based on liquidity provision theory, we investigate the impacts of opening to foreign traders on the market quality of China’s 10 commodity futures using the synthetic control method. Specifically, we measure market quality based on activity, liquidity, and price efficiency using tick-by-tick data. We find that opening to foreign traders reduced (improved) the market quality of iron ore (purified terephthalic acid and rapeseed oil) futures significantly and had limited impacts on palm oil, soybean No. 1, soybean No. 2, soybean oil, soybean meal, rapeseed meal, and peanut kernel futures. The competition channel plays a dominant role in the influence mechanism, whereas the adverse selection channel does not play a significant role. We conclude that coke, ferrosilicon, stainless steel, and glass futures have the highest priority to be opened. Our findings have practical significance for implementing the internationalization of commodity futures in emerging countries.