Option Exchange Design: Liquidity and Trading Activity at the Swedish Index Options Market

Review of Futures Markets, Vol. 14, 2006

Posted: 9 Aug 2006

See all articles by Lars L. Norden

Lars L. Norden

Stockholm University - Stockholm Business School

Abstract

Recently, the Swedish options and futures exchange (OM) launched some regulatory changes in the design of the OMX index options market. The redesign constituted two alterations in the option contract specifications; a coarser strike price interval for the index options, and a 4:1 split affecting options and futures alike. This study investigates whether the combined redesign affects option market liquidity and trading activity. The results show evidence to support the idea that the redesign has lead to lower liquidity and higher transactions costs at the options market. In fact, option bid-ask spreads are wider and trading volume is lower following the redesign. Also, a contemporaneous increase in liquidity is observed at the futures market. For an investor considering the trade-off between standardisation costs and transactions costs, a replication strategy using futures appears to be relatively more favourable than an outright option position in the redesigned market environment.

Keywords: Option exchange design, Liquidity, Trading activity

JEL Classification: G13

Suggested Citation

Nordén, Lars L., Option Exchange Design: Liquidity and Trading Activity at the Swedish Index Options Market. Available at SSRN: https://ssrn.com/abstract=923319

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

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