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

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  • Thanos Verousis
  • Owain ap Gwilym
  • Nikolaos Voukelatos

Abstract

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. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:397–417, 2016

Suggested Citation

  • Thanos Verousis & Owain ap Gwilym & Nikolaos Voukelatos, 2016. "The Impact of a Premium‐Based Tick Size on Equity Option Liquidity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(4), pages 397-417, April.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:4:p:397-417
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    Cited by:

    1. Thanos Verousis & Pietro Perotti & Georgios Sermpinis, 2018. "One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 353-392, February.
    2. Yamamoto, Ryuichi, 2020. "Limit order submission risks, order choice, and tick size," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    3. Alejandro Bernales & Thanos Verousis & Nikolaos Voukelatos & Mengyu Zhang, 2020. "What do we know about individual equity options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 67-91, January.

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