Institutional impact and quote behavior implications of the options penny pilot project

• Proportional NBBO spreads decrease significantly for the pilot securities.
• Average quote size significantly declines for pilot securities.
• Most pilot securities experience significant increases in quote traffic.
• Changes in average trading volume do not appear to be attributable to the PPP.
• The PPP does not appear to have a negative impact on institutional trading activity.

In this study, we expand the analysis of the impact of the options penny pilot project (PPP) using a sample that covers the first three phases of the project, a control group of options that were not part of the project, and options market specific control variables. We show that proportional national best bid offer spreads decrease significantly for the pilot securities, with the control sample demonstrating a general increase in relative spreads. Regression analysis indicates that a decrease in relative spreads can be explained by the switch to penny quoting. We find that the average quote size significantly declines and most pilot securities experience significant increases in quote traffic during the pilot period. For equity options in the pilot group we do not find a pattern of change in the average trading volume that can be attributed to the PPP. The average trading volume shows a general increase for the ETF options in the pilot group during the pilot period. Based on the findings derived from a sample of opening and closing “large” trades, we do not find conclusive evidence that trading in penny increments has a negative impact on the volume of institutional trading activity on the options exchanges during the first few months of Phase I. Our results for relative spreads, average quote size, quote traffic and trading volume are robust to Phases I–III of the PPP.