What makes carbon traders cluster their orders?

Abstract

The ability to trade large amounts of assets at low costs could be hindered when the size of the orders is concentrated at specific trade sizes. This paper documents evidence of size clustering behavior in the European Carbon Futures Market and analyzes the circumstances under which it happens. Our findings show that carbon trades are concentrated in sizes of one to five contracts and in multiples of five. We have also demonstrated that more clustered prices have more clustered sizes, suggesting that price and size resolution in the European Carbon Market are complementary and that carbon traders round both the price and the size of their orders. Finally, the analysis of the key determinants of the size clustering reveals that traders use a reduced number of different trade sizes when uncertainty is high, market liquidity is poor, and the desire to open new positions and cancel old ones is very strong.