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The Impact of a Premium-Based Tick Size on Equity Option Liquidity

Verousis, Thanos, ap Gwilym, Owain, Voukelatos, Nikolaos (2015) The Impact of a Premium-Based Tick Size on Equity Option Liquidity. Journal of Futures Markets, 36 (4). pp. 397-417. ISSN 0270-7314. E-ISSN 1096-9934. (doi:10.1002/fut.21734) (KAR id:52141)


On June 2, 2009, NYSE LIFFE Amsterdam reduced the tick size for options trading at prices below 0.20 from 0.05 to 0.01 and on April 1, 2010, the exchange increased the price threshold to 0.50. We study the effect of that tick size reduction on the liquidity of individual equity options. In this respect, this study is uniquely positioned in the options context where moneyness is a clear additional factor in the implementation of the tick size changes. We show that, in general, quoted and traded option liquidity increased but at a rate decreasing with option moneyness. Real costs fell more for the lower priced contracts. Importantly, we show that the ability of the market to absorb larger trades has potentially diminished after the change in the tick size. We document a substantial increase in quote revisions which implies an increase in price competition and, as a result, an improvement in market quality. Finally, the decrease in the tick size led to an increase in hedging activity using deep-out-of-the-money puts.

Item Type: Article
DOI/Identification number: 10.1002/fut.21734
Uncontrolled keywords: Liquidity, Tick Size, PBTS, Equity options, Amsterdam, G12, G20
Subjects: H Social Sciences > HG Finance
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Nikolaos Voukelatos
Date Deposited: 22 Nov 2015 12:56 UTC
Last Modified: 07 Oct 2021 13:42 UTC
Resource URI: (The current URI for this page, for reference purposes)

University of Kent Author Information

Voukelatos, Nikolaos.

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