Verousis, Thanos and ap Gwilym, Owain and Voukelatos, Nikolaos (2016) The Impact of a Premium-Based Tick Size on Equity Option Liquidity. Journal of Futures Markets, 36 (4). pp. 397-417. DOI https://doi.org/10.1002/fut.21734
Verousis, Thanos and ap Gwilym, Owain and Voukelatos, Nikolaos (2016) The Impact of a Premium-Based Tick Size on Equity Option Liquidity. Journal of Futures Markets, 36 (4). pp. 397-417. DOI https://doi.org/10.1002/fut.21734
Verousis, Thanos and ap Gwilym, Owain and Voukelatos, Nikolaos (2016) The Impact of a Premium-Based Tick Size on Equity Option Liquidity. Journal of Futures Markets, 36 (4). pp. 397-417. DOI https://doi.org/10.1002/fut.21734
Abstract
On June 2, 2009, NYSE LIFFE Amsterdam reduced the tick size for options trading at prices below € 0.20 from € 0.05 to € 0.01 and on April 1, 2010, the exchange increased the price threshold to € 0.50. We study the effect of that tick size reduction on the liquidity of individual equity options. In this respect, this study is uniquely positioned in the options context where moneyness is a clear additional factor in the implementation of the tick size changes. We show that, in general, quoted and traded option liquidity increased but at a rate decreasing with option moneyness. Real costs fell more for the lower priced contracts. Importantly, we show that the ability of the market to absorb larger trades has potentially diminished after the change in the tick size. We document a substantial increase in quote revisions which implies an increase in price competition and, as a result, an improvement in market quality. Finally, the decrease in the tick size led to an increase in hedging activity using deep‐out‐of‐the‐money puts.
Item Type: | Article |
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Subjects: | H Social Sciences > HG Finance |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 15 Mar 2019 15:08 |
Last Modified: | 16 May 2024 19:33 |
URI: | http://repository.essex.ac.uk/id/eprint/24178 |
Available files
Filename: tickSize_textFull.pdf