The Impact of a Premium Based Tick Size on Equity Option Liquidity

38 Pages Posted: 22 Sep 2014

See all articles by Thanos Verousis

Thanos Verousis

Essex Business School

Owain Ap Gwilym

Bangor Business School

Nikolaos Voukelatos

University of Kent

Date Written: September 21, 2014

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 have fallen more for the lower priced contracts. Importantly, we show that the ability of the market to absorb larger trades has diminished after the change in the tick size. We document a substantial increase in quote revisions that implies a deterioration in the order book, as it allows traders to take advantage of the price priority rule and step ahead of larger trades. Finally, the decrease in the tick size has led to increased speculative trading behaviour.

Keywords: Liquidity, Tick Size, PBTS, Equity options, Amsterdam LIFFE

JEL Classification: G12, G20

Suggested Citation

Verousis, Thanos and ap Gwilym, Owain and Voukelatos, Nikolaos, The Impact of a Premium Based Tick Size on Equity Option Liquidity (September 21, 2014). Available at SSRN: https://ssrn.com/abstract=2499132 or http://dx.doi.org/10.2139/ssrn.2499132

Thanos Verousis (Contact Author)

Essex Business School ( email )

United Kingdom

Owain Ap Gwilym

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

HOME PAGE: http://www.bangor.ac.uk/business/staff/owain_ap_gwilym.php.en

Nikolaos Voukelatos

University of Kent ( email )

Canterbury, Kent CT2 7PE
United Kingdom
0044 (0) 1227827705 (Phone)

HOME PAGE: http://https://www.kent.ac.uk/kbs/profiles/staff/voukelatos_nikolaos.html

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