Options Decimalization

Posted: 20 May 2019

Date Written: December 14, 2016

Abstract

We document the outcome of an options decimalization pilot on Canada’s derivatives exchange. Decimalization improves measures of liquidity and price efficiency. The impact differs by the moneyness of an option and is greatest for out-of-the-money options. In contrast with equity studies, decimalization improved depth near the best prices and improved liquidity for larger trades. We conclude with advice on decimalizing options: options that benefit most have underlying volatility less than 40, underlying equity bid-ask spread less than 50 basis points, at least one trade a day, and a distribution of depth skewed toward marketable prices.

Keywords: Options markets, decimalization, tick size, market microstructure, market design

JEL Classification: G20, G14, L10

Suggested Citation

Chin, Faith and Garriott, Corey, Options Decimalization (December 14, 2016). Journal of Derivatives, Vol. 25, No. 1, 2017, https://doi.org/10.3905/jod.2017.25.1.088, Available at SSRN: https://ssrn.com/abstract=2885409 or http://dx.doi.org/10.2139/ssrn.2885409

Faith Chin

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Corey Garriott (Contact Author)

TMX Group ( email )

130 King St W
Toronto, Ontario M5X 2A2
Canada

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