Price Discrimination Against Retail Investors: Evidence from Mini Options
55 Pages Posted: 4 Jan 2018 Last revised: 11 May 2018
Date Written: May 6, 2018
This paper studies the rise and fall of “Mini” options that are especially catered to retail investors for popular but high-priced securities. Using transaction-level data, we find that transaction costs of Mini options are much higher than those of standard options and the difference cannot be fully explained by cost-related determinants. Furthermore, we find evidence of price discrimination against retail investors from analyses of price elasticities of option traders, an event-study of changes in bid-ask spreads around earnings announcements, and comparisons of trade prices paid by Mini and standard option traders for the same security at approximately the same time.
Keywords: options, retail investors, liquidity, price discrimination, earnings announcements
JEL Classification: G10, G13, G20, G24
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