Essays on the microstructure of US equity options

This thesis is structured as three essays on market microstructure of US equity options. The appearance of high-frequency trading changed the process of trading and the structure of financial markets. Additionally, literature on individual equity options is relatively low because of the problems with data availability. Hence, the three essays investigate the market microstructure of US equity options from three aspects through a high-frequency dataset including all options contracts written the 30 components of the Dow Jones Industrial Average from January 2012 to June 2014. The first essay fulfils research gaps by investigating the intraday commonality in options liquidity in a quote-driven market. It finds that the commonality in option liquidity is driven by the inventory risks and represents a higher level at the beginning of the trading day. The second essay investigates the informational content of options order flow through a new proxy of predictive information. It finds that the options trades contain predictive information about the future price movements of underlying stocks. This predictive power is varied across information contents of calls and puts. In particular, the informational contents of calls have the longer predictive horizon in stock volatility and those of puts have greater predictive power on stock returns. The third essay focuses on price clustering and size clustering which has been limited to investigations into options markets. It provides supportive evidence that prices and sizes are clustered in the options market. The relationships between price and size clustering have different between calls and puts. For calls, price clustering has a positive impact on size clustering. For puts, size clustering is negatively related to price clustering. Moreover, the moneyness and maturity can also influence price and size clustering because this essay finds out-of-the money contracts and near-to-maturity contracts show less price and size clustering.