edgers and speculators in futures markets who use market orders may pay a price H for getting their order filled quickly. Holbrook Working (1977) argued that an urgent seller may have to sell at a price just below that of the last transaction while an urgent buyer may have to pay a price just above the price for the last transaction. The difference in price paid (received) by the urgent buyer (seller) is often called a liquidity cost.' Any limit order can provide liquidity, but liquidity is primarily provided by floor traders who bid and offer for their own account. Floor traders can be either day traders who are short term speculators or scalpers who continually quote bids and offers against which market orders can be executed. The scalpers provide liquidity, but they do so only because they expect to earn a return.
Both speculators and hedgers who submit market orders through floor brokers should be concerned about the size of these liquidity costs. Futures exchanges need to know the size of liquidity costs to evaluate new alternatives such as electronic trading. Researchers also need to know the size of liquidity costs so they can account for them when simulating hedging strategies or speculative trading. These same groups also need to know what factors make these liquidity costs vary.
The purpose of this paper is to report research estimating the size of liquidity costs and scalping returns in the corn futures market and to determine what factors are related to the size of these costs and returns. The paper also provides information about the distribution of intraday prices.
PREVIOUS RESEARCH
Previous research has found that intraday prices are negatively autocorrelated [see Working (1977), Martell andHelms (1979), Helms andMartell (1985), Trevino andMartell (1984), andThompson andWaller (1986)l. This negative autocorrelation results from scalpers attempts at earning a profit from filling market orders. Orders to buy at the mar-Helpful comments from Tim Baker, Jon Brandt, Scott Irwin, and Bill Uhrig and computational assistance 'The stop orders used by some traders are market orders rather than limit orders. These are orders to sell or ?his cost is in addition to commission costs. Thus, total transaction costs equal commission costs plus li-from Robert J. Nielsen and Louis P. Lukac are gratefully acknowledged. buy at the market whenever a certain price is touched. quidity costs.