| Summary: | We investigate the contribution of microstructural factors in the formation of commodities prices, using a completely new set of intra-daily data from the London Metal Exchange (LME). We chose the LME because its interesting structure allows the comparison of three alternative trading mechanisms: (i) The Inter-Office telephone market; (ii) Two daily sessions of floor market; (iii) The electronic trading platform (since 2001). The thesis begins with a review of the literature on market microstructure (Chapter 1), followed by a detailed description of the structure of the LME (Chapter 2). We then move to the empirical evidence from the LME. We first focus on the comparison of decentralized and floor trading systems (Chapter 3). For this purpose, we use a data set relative to the period February - April 2000, before the introduction of the electronic system. We find that the trading mechanism affects volume, volatility, spreads, price discovery and metals relationships. We investigate the robustness of these results, in a different period: February - May 2006 (Chapter 4). Since October 2000, there has been an extension of the floor's opening times: we find that this has an impact on market variables. We also compare the traditional and electronic market, LME Select, launched in February 2001 (followed by an updated version in 2003). We find that there is more trading activity and price discovery on LME Select, but LME Rings still concentrate a large amount of trades, and spreads are smaller. As a consequence of these structural changes, overall trading activity has increased since 2000, and spreads have lowered. In the final Chapter (Chapter 5), we model a computer-simulated environment to investigate the impact of trading mechanisms from a different angle. The results confirm the empirical findings that price properties are affected by the trading system.
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