Volume 14 | Issue 3 | Article 2

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Option Exchange Design: Liquidity and Trading Activity At the Swedish Index Options Market
Lars Nordén (G13)

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 specification: 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 led 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 standardization costs and transactions costs, a replication strategy using futures appears to be relatively more favorable than an outright option position in the redesigned market environment.