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Equity option liquidity after the introduction of the Premium Based Tick Size on NYSE LIFFE Amsterdam

Verousis, Thanos, ap Gwilym, Owain, Voukelatos, Nikolaos (2014) Equity option liquidity after the introduction of the Premium Based Tick Size on NYSE LIFFE Amsterdam. In: 7th Financial Risks International Forum – Big Data in Finance and Insurance, March 2014, Paris. (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided. (Contact us about this Publication)
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http://risk2014.institutlouisbachelier.org/fichier...

Abstract

On June 2, 2009, NYSE LIFFE Amsterdam reduced the tick size of options trading below €0.20 from €0.05 to €0.01 and on April 1, 2010, the exchange increased the price threshold to €0.50. In this paper, we study the effect of that tick size reduction on the liquidity of individual equity options. We show that, in general, quoted and traded option liquidity increased but at a rate decreasing with option moneyness. Real costs have fallen more for the lower priced contracts. Importantly, we show that the ability of the market to absorb larger trades has diminished after the change in the tick size. We document a substantial increase in quote revisions that implies that the decrease in tick size has potentially led to a worsening of the order book, as it allows traders to take advantage of the price priority rule and step ahead of larger trades. Finally, the decrease in the tick size has led to an increase of speculative trading behaviour.

Item Type: Conference or workshop item (Paper)
Uncontrolled keywords: Liquidity, Tick Size, PBTS, Equity options, Amsterdam LIFFE
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Nikolaos Voukelatos
Date Deposited: 16 Jun 2014 18:43 UTC
Last Modified: 29 May 2019 12:41 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/41456 (The current URI for this page, for reference purposes)
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