Contract Size Changes in the Options Market: Effects on Market Efficiency and Investor Behavior

Abstract

We study options market participants’ trading behavior before and after the options multiplier increases. After the options multiplier increases, the options market becomes more efficient. By analyzing the high-frequency microstructure dataset, we show that local retail and local institutional investors who trade in both options and futures markets trade more after the change in the multiplier. Our results imply that the increase in the market efficiency may be caused by fewer speculators. In addition, lottery stocks are traded more actively after the options multiplier increase.

Keywords: Account-level trade and quote data, Index options, Lottery stocks, Options multiplier, Retail investor

JEL Classification: G12, G14, G18