When Trading Options is Not the Only Option: The Effects of Single-Stock Futures Trading on Options Market Quality

Abstract

The literature documents that the short-selling ban during the financial crisis led to a significant deterioration of options market quality. We examine the impact of single-stock futures (SSFs) trading on options market quality during the short-selling ban period. We show that there is a substitution effect between options trading and SSFs trading during the ban period and SSFs trading fails to complement the trading of put options. Nevertheless, our results show that SSFs trading had a significant effect in narrowing the bid-ask spreads of options contracts. Moreover, compared to stocks without SSFs, stocks with SSFs were less likely to violate put-call parity during the ban period. Our results suggest that SSFs trading helps mitigate the negative effect of the short-selling ban on options market quality.

Keywords: Short Selling Ban, Financial Crisis, Single-Stock Futures, Options Market Quality

JEL Classification: G01, G14