Option Exchange Design: Concentration of Trading and Open Interest at the Swedish Index Options Market

16 Pages Posted: 19 May 2003

See all articles by Lars L. Norden

Lars L. Norden

Stockholm University - Stockholm Business School

Abstract

What is the optimal design of an options market? From investors' as well as the option exchange's point of view it ought to be a marketplace where demand and supply for different contracts balances, and where the choice between trading in different contracts ought to be discretionary considering liquidity and transactions costs. During 1997 and 1998, the Swedish options exchange (OM) launched some regulatory changes in the design of the OMX-index options market. One intention with the changes was to obtain a coarser strike price interval for the index options, aiming for a more balanced demand for the outstanding contracts. This study introduces the Hirschman - Herfindahl index as a measure of the degree of concentration in open interest among different option contracts. The contributions to previous research consist of using this index to measure concentration in open interest, analysing the time series characteristics of the index, as well as investigating whether the changes in exchange rules affect concentration. Some evidence in favour of the hypothesis that the altered strike price intervals have reduced concentration in option open interest is found. Controlling for other factors, which potentially might influence open interest concentration, the widening of the strike price intervals induces a significant decrease in the concentration of put open interest. However, a similar (significant) effect cannot be found with respect to the concentration of call open interest.

Suggested Citation

Nordén, Lars L., Option Exchange Design: Concentration of Trading and Open Interest at the Swedish Index Options Market. EFMA 2003 Helsinki Meetings. Available at SSRN: https://ssrn.com/abstract=392583 or http://dx.doi.org/10.2139/ssrn.392583

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

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