Determinants of commodity market liquidity

Using positions data for 18 commodity futures during 2001-2020, we examine systematic and idiosyncratic determinants of Amihud price impact and microstructure noise proxying for permanent and transitory components of commodity futures liquidity. Idiosyncratic factors have the largest economic impact: while excess hedging demand increases PI and noise, active position-taking (by market-makers) in excess of the hedging demand reduces noise. Systematic factors, including the lack of competition among liquidity providers, adversely impact liquidity, but this effect is mitigated if liquidity providers are well-capitalized. Supplementary leverage ratio (SLR) makes holding inventory costlier and is associated with lower liquidity.