Contract size changes in the options market: effects on market efficiency and investor behaviour

ABSTRACT

We study options market participants’ trading behaviour before and after the options multiplier increases. After the options multiplier increases, the options market becomes more efficient. By analysing 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

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Consider the result in column (3) in Table 4 when the market volatility (vkospi) is 21. The put-call parity violation after the multiplier increase is $-100.611+5.266\times 21=9.975$, which is higher than before.

² One might imagine the effect of multiplier changes on investors who only trade futures. However, since the regulation change was designed to have an impact on options traders, we focus on the investors who trade in the options market. Thus, we do not include any accounts that only trade futures.

³ Our results are robust even if we change our sample to include one-year periods before and after the event and only the accounts that participate in the market at least three out of the four previous quarters.

Additional information

Funding

This work was supported by the Research Grants Council, University Grants Committee [25500517].