The order flow cost of index rolling in commodity futures markets

Commodity index rolling is treated as a natural experiment and an event study of order flow costs in a wide array of futures markets is conducted. The spread between nearby and deferred futures prices decreases significantly in the early and growth phases of financialization (1991-2011), with the spreads reversing back after rolling is completed. Spread impacts disappear in the post-financialization period (2012-2019). We argue that a dramatic increase in the supply of liquidity brought on by the transition to electronic trading in commodity futures markets is primarily responsible for the decline of roll order flow costs.