Research → Market Microstructure

MARKET MICROSTRUCTURE

Liquidity Regimes and Price Discovery in Gold Spot Markets

An empirical study of market microstructure across London, Comex, and Shanghai

Blackmark Dominion Research Inc. · March 18, 2026 · 18 min read

Abstract

This paper examines the dynamics of liquidity provision across three major gold trading venues: the London OTC market, CME Comex futures, and the Shanghai Gold Exchange. Using tick-level data from 2019–2025, we construct a regime classification framework that identifies distinct liquidity states based on spread behavior, volume clustering, and order flow imbalance metrics.

Introduction

Gold markets are among the deepest and most liquid in global finance, yet their microstructure remains under-studied relative to equities or FX. The distributed nature of gold trading — spanning OTC dealer markets, centralized futures exchanges, and Asian physical markets — creates complex liquidity dynamics that vary significantly by session, venue, and macro regime.

Methodology

We define liquidity regimes using a hidden Markov model with three states, estimated on a rolling 90-day window. Observable inputs include normalized bid-ask spreads, Kyle lambda, volume-weighted time between trades, and the Amihud illiquidity ratio.

Key Findings

Session-dependent liquidity clustering. London morning hours consistently exhibit tighter spreads and lower price impact, while Asian session liquidity is more fragmented and sensitive to macro communications.

Regime persistence. Once a low-liquidity regime is entered, it persists for an average of 4.2 hours, creating meaningful windows where execution costs are elevated.

Conditional execution reduces slippage by 12–23 basis points. Strategies that delay execution until favorable regimes show measurable cost savings.

References

  • Kyle, A.S. (1985). Continuous Auctions and Insider Trading. Econometrica, 53(6), 1315–1335.
  • Amihud, Y. (2002). Illiquidity and Stock Returns. Journal of Financial Markets, 5(1), 31–56.
  • Hasbrouck, J. (2009). Trading Costs and Returns for US Equities. Journal of Finance, 64(3), 1445–1477.

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