# DIVISION OF ECONOMIC AND RISK ANALYSIS1 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A6aebd220700f155a ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text MEMORANDUM FILE TO: DIVISION OF ECONOMIC AND RISK ANALYSIS1 FROM: SUBJECT: CORNERSTONE ANALYIS OF THE IMPACT OF THE OPTION PENNY PILOT PROGRAM ON MARKET QUALITY DATE: DECEMBER 18, 2017 The Division of Economic and Risk Analysis contracted with Cornerstone Research (“Cornerstone”), an economic and financial consulting firm, to conduct analyses related to investigating the effects on market quality of the continuing pilot program that allows certain exchange-traded options to be quoted in reduced price increments2 (“Option Penny Pilot” or “Pilot”). Cornerstone’s analysis uses quoted and effective spreads as measures of market quality.3 Effective and quoted spreads are frequently used as measures of trading costs and are especially useful in assessing overall market quality for retail investors.4 The Division believes that the methodology employed by Cornerstone in the analysis is appropriate to address the questions presented and agrees with the conclusions drawn by Cornerstone based on that analysis. Main Finding: The Cornerstone analysis finds that inclusion in the Pilot is associated with a statistically significant decrease in effective and quoted spreads for the most liquid options - those with trading volume in the top five percent of the universe of all listed option classes.5 However, for less liquid options, the results do not suggest that inclusion in the Pilot has a significant effect on 1 This is a memorandum by the Staff of the Division of Economic and Risk Analysis of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings or conclusions contained herein. 2 More specifically, the Pilot specifies that options trading at less than $3.00 have trading increments of one cent, while those trading at $3.00 or more have trading increments of five cents. Options not in the Pilot have corresponding minimum price increments of $0.05 for options trading below $3.00 and $0.10 for options above $3.00. The Pilot makes an exception for options on the QQQQ, IMW and SPY which trade at or above one cent increments, regardless of price level. 3 In Cornerstone’s analysis, spreads are volume-weighted across different trades in an option series, and then equally weighted across option series, in order to obtain spreads for the option-class day. Those spreads are then equally weighted across different days in the pre-event month and the post-event month, respectively, in order to obtain option-class month observations. 4 “Decimal Pricing Has Contributed to Lower Trading Costs and a More Challenging Trading Environment,” GAO report, May 2005, at 3 (available at http://www.gao.gov/new.items/d05535.pdf). 5 Note that Cornerstone’s analysis on option classes on common stock incorporates data on 3,833 option classes and 1,331,185 class-day observations. market quality. Cornerstone reports that the option classes added to the Pilot were mostly chosen from the most liquid and heavily traded option classes.6 Comparison to Analyses of Self-Regulatory Organizations: Several Self-Regulatory Organizations (SROs) conducted analyses of the effects of the Options Penny Pilot. The SROs made these analyses available on their websites.7 The reports of the SROs focus on the activity on their own exchanges; none of the reports takes a holistic view of the Pilot on all exchanges. Also, their analyses typically did not use control samples. Finally, the most recent of the publicly available reports from an SRO dates from 2013, and thus the Cornerstone analysis covers more recent time periods.8 However, the SRO analyses generally agree with the conclusions drawn from Cornerstone’s analysis that the Pilot was associated with a narrowing of spreads. Analysis: Cornerstone’s analysis uses quoted and effective spreads as a measure of market quality, and it employs two methodologies. The first methodology uses a univariate “difference-in-differences” approach, in which the changes in quoted and effective spreads during the Pilot for options classes included in the Pilot are compared to contemporaneous changes in spreads for a control sample of option classes that were not included in the pilot. Options classes included in the control sample were matched on option class volume and underlying market capitalization. This sample was referred to as the “matched sample”. The second methodology uses multivariate regression models to explain variation in the quoted and effective spreads before and after option classes were added to the Pilot. These models include independent variables to control for other factors that can impact spreads, including option volume, underlying stock volume, and underlying stock volatility. Using data on options on common stocks added to the Pilot between January 26, 2007 and January 5, 2016,9 both methodologies have similar findings. The “difference-in-differences” 6 Although some of the original thirteen options were not among the most liquid, most heavily traded options, the order approving the commencement of the penny pilot program describes the selection of the initial option classes as follows; “The Commission believes that the thirteen options classes to be included in the penny pilot program represent a diverse group of options classes with varied trading characteristics. This diversity should facilitate analyses by the Commission, the options exchanges and others.” See Securities Exchange Act Release No. 55156 (January 23, 2007), 72 FR 4759, 4760 (February 1, 2007) (SR-NYSEArca-2006-73) (Order approving a penny pilot program on NYSE Arca). 7 These data and analyses are available online at https://www.nyse.com/markets/amex-options/reports , http://www.ise.com/options-penny-pilot , https://www.cboe.org/generalinfo/pdfframed?content=/hybrid/cboepennypilotreport03042008.pdf§ion=SEC_HYBRID_HOME&title=CB OE%20Penny%20Pilot%20Report and http://boxoptions.com/regulatory/pilot-reports/ 8 http://www.ise.com/assets/files/investors/Topaz_Penny_Pilot_Report_15.pdf 9 Results for 693 option classes on ETFs were generally similar to option classes on common equity. 2 tests find that, compared to the control sample, inclusion in the Pilot is associated with a decrease in effective spreads of 3.5 cents and a decrease in quoted spreads of 5.1 cents. Similarly, using the same matched sample, the regression model finds that the Pilot is associated with a decrease in effective spreads of 3.6 cents and a decrease in quoted spreads of 5.2 cents. These results are statistically significant. Cornerstone reports results separately for sub-periods 2007-2009, 2010-2011, and 2012-2015. The results are generally weaker in both statistical significance and in economic magnitude for the period 2012-2015. One potential explanation advanced by Cornerstone for the smaller decrease in spreads for later additions to the Pilot is that the benefits of the Pilot are most pronounced for options on larger stocks or for option classes with the highest trading volume, and to the extent that the later additions to the Pilot tend to be smaller stocks with lower-volume options, there would be smaller declines in spreads for the later additions. Also, the 2012–2015 results are based on a relatively small sample of options. One caveat to the results of the analysis that Cornerstone emphasizes is that the option exchanges have a different fee structure for classes within and outside the Pilot. Cornerstone’s analysis does not try to examine whether the improvements in market quality could be attributed only to the Pilot, or also to the differing fee structures. However, Cornerstone also notes that the average declines in execution costs for the most liquid option classes appear to be substantially higher than the potential impact of any fee adjustments. As option classes added to the Pilot were mostly the most liquid and heavily traded, Cornerstone also includes analysis specifically aimed at testing whether the Pilot contributed to improved market quality for less liquid option classes. The analysis uses more recent data, from February 2016, in order to allow the testing of the impact of the Pilot on option classes that may have been more liquid when they were originally added to the Pilot, but that over time became less liquid. Due to the low liquidity of these option classes, had the inclusion decision been made in February 2016, they may have not been selected for inclusion in the Pilot. However, Cornerstone’s analysis is neither consistent nor inconsistent with the proposition that additional low volume option classes would benefit from pilot inclusion.10 Compared to samples of non-Pilot options matched on option class volume, underlying market capitalization, and underlying price, the results indicate evidence of statistically significant reductions in quoted and effective spreads for the top two quartiles, by trading volume, of option classes included in the Pilot. These option classes have trading volume in the top 5% of the universe of all listed option classes. While Cornerstone also finds reductions in spreads for the bottom two 10 Also, there exist some option classes with liquidity equal to that of those in the Pilot, but they are not in the Pilot because they did not meet the Pilot requirements at the time a replacement class was being added to the Pilot. Some of these are included in the controls used for the Third and Fourth Quartile in Table 22 of Cornerstone’s research, described as “Number of Clusters for Matching with Replacement”. 3 quartiles of option classes included in the pilot, these reductions are generally not statistically significant. Conclusion: The evidence Cornerstone presents suggests that the existing Pilot program has resulted in improvements in market quality (as measured by quoted and effective spreads) for the Pilot option classes. Cornerstone’s research does not provide any clear evidence that expanding the Pilot to include lower-volume options would result in similar benefits. While noting that the analysis does not control for different fee structures that apply to option classes included and excluded from the Pilot, Cornerstone asserts that the estimated reduction in execution costs for option classes within the pilot appear to be substantially larger than the potential impact of fee differentials. 4 MEMORANDUM DATE: July 3, 2017 TO: Division of Economic and Risk Analysis FROM: Stewart Mayhew, Cornerstone Research RE: Analysis of the Impact of the Option Penny Pilot Program on Market Quality Executive Summary This memo summarizes research requested by the staff of the Commission’s Division of Economic and Risk Analysis (DERA) under the terms of contract SECHQ1-16-C0024 with Cornerstone Research.1 This research relates to an ongoing pilot program that, since 2007, has allowed certain exchange-traded options to be quoted in reduced price increments (“Option Penny Pilot” or “Pilot”). DERA staff requested an analysis of the impact of the Option Penny Pilot on market quality, as part of an effort to evaluate the efficacy of the program. The current memo summarizes our research investigating the extent to which inclusion in the Pilot impacts measures of market quality. The results of this research should aid the staff of the Commission as it seeks to evaluate the overall impact of the Pilot, and as it makes decisions regarding whether 1 The analysis summarized in this memo was undertaken by a team of researchers under the direction of Dr. Stewart Mayhew at Cornerstone Research. The team also included Dr. Amber Anand of Syracuse University, Dr. D. Timothy McCormick, and the staff of Cornerstone Research. The findings presented herein are results of analysis performed by the research team in response to specific requests and questions from DERA staff. This memo does not seek to offer any policy recommendations, and should not be construed as an endorsement by the authors or by Cornerstone Research of any particular policy alternative. Any views and interpretations expressed in this memo are solely those of Dr. Mayhew, Dr. Anand, and Dr. McCormick, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research. the program should be made permanent and/or whether the program covers the appropriate number of option classes. The research summarized herein encompasses the addition of option classes to the Pilot over an eight-year period between January 26, 2007 and January 5, 2016. It analyzes the impact of addition to the Pilot on quoted and effective spreads, while attempting to control for other factors that influence spreads and for any selection bias that may influence the addition of certain option classes to the program. Section I of this memo provides a brief overview of the background of the Pilot, including the timing of when new option classes were added. Section II describes the data used for the analysis. Section III reports summary statistics for option class volume, underlying stock volume, and underlying market capitalization for option classes already in the Pilot, new classes selected for inclusion in the Pilot, and option classes not in the Pilot, as of each addition date (“event date”). The option classes in the Pilot and those selected for inclusion tend to have significantly higher trading volume and tend to be on underlying stocks with higher market capitalization compared to classes not participating in the Pilot. Section IV provides additional detail regarding the construction of control samples and reports summary statistics for the control samples. Section V presents results of univariate “difference-in-differences” tests, which compare changes in quoted and effective spreads after option classes are added to the Pilot to contemporaneous changes in spreads for a control sample of non-switching option classes (matched on option class volume and underlying market capitalization). The difference-indifferences results (presented in Table 5) indicate that inclusion in the Pilot is associated with a 2 decrease in dollar effective spreads of 3.5 cents and a decrease in dollar quoted spreads of 5.1 cents. These decreases were found to be statistically significant at the 1% confidence level, and similar results were found for relative spreads. Results are also reported separately for subperiods 2007–2009, 2010–2011, and 2012–2015. The average decline in spreads was smaller for the most recent additions to the Pilot in 2012–2015, although this group has relatively few observations. The decline in spreads is found to be robust for option classes with different levels of underlying market capitalization (Table 6) and option class trading volume (Table 7). Section VI analyzes additions to the Pilot using a multivariate regression approach designed to control for other factors that can impact spreads, including option volume, underlying stock volume, and stock volatility. This analysis confirms that inclusion in the Pilot is associated with a statistically significant decline in effective spreads and quoted spreads, although the estimated magnitude of the effect varies somewhat, depending on how the model is implemented. When the regression model is estimated on the entire universe of listed options, the results indicate that inclusion in the Pilot is associated with a decrease in effective spreads of 8.8 cents (Table 13) and a decrease in quoted spreads of 16.1 cents (Table 14). When the model is estimated only on the matched sample described in Section IV, the Pilot is associated with a decrease in dollar effective spreads of 3.6 cents (Table 15) and a decrease in dollar quoted spreads of 5.2 cents (Table 16). Similar results are found for percentage spreads. The decline in effective spreads is found to be largest in the 2010–2011 subperiod, and smallest for the most recent additions in 2012–2015. In some specifications, the effect of the Pilot program is found to be close to zero and not statistically significant for the 2012–2015 subperiod. We reiterate the caveat for the 2012–2015 results that they are based on a relatively small sample of switching options. 3 Section VII explores further whether the Pilot is contributing to an improvement in market quality for the least liquid option classes, a question that is significant if the Commission staff wishes to consider whether penny quoting should be expanded to a larger set of option classes or constricted to a smaller set. This question presents empirical challenges because the option classes added to the Pilot are generally the most liquid, thus making it difficult to extrapolate the benefits of the Pilot to less liquid option classes. We address this by examining market quality for Penny Pilot option classes using a more recent period of February 2016. The examination of a recent period allows us to study Penny Pilot option classes that may have been more liquid when they were originally added to the Pilot but with the passage of time became less liquid. The analysis compares spreads between Pilot options and a control sample of (nonPilot) options, matched on option volume, underlying market capitalization, and underlying price. Results are reported by option volume quartiles to examine whether the benefits of inclusion in the Pilot taper off at a particular threshold (Table 23). The results indicate evidence of significant benefits of inclusion in the Pilot for the top two quartiles, corresponding to the option classes with trading volume in the top 5% of the universe of all listed option classes. For the bottom two quartiles of Pilot options, most of the results are not statistically significant, suggesting that the benefits of the Pilot decline as option liquidity declines. I. Background: Option Penny Pilot Program On Friday, January 26, 2007, the options exchanges commenced the Pilot program to quote and trade options on 13 stocks and ETFs in one-cent increments. The Pilot specified that options trading at less than $3.00 would have trading increments of one cent, while those trading 4 at $3.00 or more would have trading increments of five cents, with the exception of options on the QQQQ which would trade at one cent increments, regardless of price level. The change represents a reduction relative to options not in the Pilot, which have corresponding minimum price increments of five cents for options trading below $3.00 and ten cents for options trading above $3.00. As summarized in Table 1, the Pilot was subsequently expanded to include additional option classes. Most notably, the Pilot was expanded by an additional 22 option classes on September 28, 2007 and 28 option classes on March 28, 2008. The Pilot was subsequently expanded to include the next 300 most actively traded, multiply-listed options classes that were not yet included in the Pilot, excluding options with high premiums. These option classes were added in groups of 75 on each of November 2, 2009, February 1, 2010, May 3, 2010, and August 2, 2010. Further, SPX and IWM began trading in one-cent increments regardless of the price level on February 1, 2010. Since 2011, additions have occurred at the beginning of January and July each year, when a handful of options (less than 10) have been added to the Pilot to replace options that no longer exist.2 This analysis encompasses the addition to the Pilot of options on common equity and ETFs, commencing on January 26, 2007 and concluding on January 5, 2016. II. Data and Sample Options Price Reporting Authority (OPRA) data were obtained from CBOE LiveVol, which contains options trades, along with contemporaneous quotes from each exchange, as well as the National Best Bid and Offer (NBBO). For each of the event dates listed in Table 1 2 See https://www.ise.com/options/regulatory-and-fees/options-penny-pilot/. 5 beginning in January 2007 and ending with the addition in January 2016, OPRA data were obtained for the full calendar month prior to the event date (“pre-event month”) and for the full calendar month subsequent to the event date (“post-event month”). For example, for the event date on January 26, 2007, data were obtained for the calendar months of December 2006 and February 2007. The OPRA data were supplemented with data from the Center for Research in Security Prices (CRSP) and OptionMetrics. CRSP data were used to obtain characteristics of the underlying equity instrument, including market capitalization, average daily trading volume, and prices. Daily OptionMetrics data were used to obtain additional characteristics of the traded option series and to provide a mapping between the OPRA and CRSP data. The analysis is focused on options on common stock and ETFs, with results reported separately for common stock and ETFs.3 Option classes for which the underlying stock or ETF traded below $1 or above $1,000 on any day during the pre-event month or the post-event month of any addition date are excluded, as are option series with non-standard settlements. Outlier spreads (effective or quoted) which are greater than $5 when the option price is less than $100, or are greater than $10, are excluded from the analysis. The sample for option classes on common stock incorporates data on 3,833 option classes and 1,331,185 class-day observations. The sample for option classes on ETFs incorporates data on 693 option classes and 194,694 class-day observations. 3 The analyses reported in the body of this memo are based on a database of regular option trades (trades involving only one leg). An analysis of complex trades shows similar results and is reported in the Appendix. 6 III. Characteristics of Options Added to the Pilot Table 2 contains summary statistics for option class volume, underlying volume, and underlying market capitalization for option classes not in the Pilot, classes being added to the Pilot, and classes already in the Pilot, computed during the pre-event month. Switching option classes generally have a higher average daily option volume, higher average daily underlying stock volume, and higher underlying market capitalization vis-à-vis option classes outside the Pilot. This is not surprising and simply reflects the fact that more actively traded options on more actively traded and larger stocks tend to be selected for inclusion in the Pilot. Note that the volume and market cap metrics for switching options decreased substantially between 2007 and 2010, indicating that option classes with higher volume and market cap were added to the Pilot prior to option classes with lower volume and market cap. Since the large number of illiquid options may unduly influence the average for volume and underlying market capitalization for options outside the Pilot, it is worth examining the distribution of these characteristics across all option classes. Figure 1 shows a scatterplot of option classes on common stock based on average daily option volume and underlying market capitalization, while Figure 2 plots option classes on common stock based on average daily underlying volume and underlying market capitalization. Figures 3 and 4 show analogous plots for option classes on ETFs. All figures plot the data as of February 2016. The distributions confirm that options in the Pilot have higher trading volume and larger underlying market capitalizations vis-à-vis the overall population of traded options. 7 IV. Control Sample The primary goal of this research is to assess the degree to which including an option class in the Pilot resulted in narrower quoted and effective spreads. Quoted and effective spreads are frequently used as measures of trading costs and, more generally, to assess market quality. Even though the analysis focuses on relatively short windows of one month before and one month after each addition date, it is possible that other market-wide factors influencing option spreads might have changed systematically between the pre-event and post-event months. The difference-in-differences methodology recognizes this possibility and controls for any such market-wide factors by comparing changes in market quality for the added option classes with contemporaneous changes in a control sample of option classes that were not added. Control samples are constructed by matching switching options with non-switching options on the basis of option class volume and underlying market capitalization. Specifically, each switching option was matched with a control option by rank ordering the entire universe of traded options on option class volume and underlying market capitalization in the pre-event month, and then minimizing the difference in ranks between the switching option and the control option. Matching was completed without replacement, that is, each control option class is matched with exactly one switching option class for each event date. The results are similar across two different sets of matched controls: an “unconstrained” set, where the matched option is any non-switching option regardless of whether it is in the Pilot, and a “constrained” set, where the control option must be outside the Pilot. In later years, when most of the highest option volume options are in the Pilot, the unconstrained sample is likely to provide a closer match for the volume of the switching option. Table 3 contains summary statistics for the 8 control samples for option classes on common stock during the pre-event month. Table 4 contains the same summary statistics for option classes on ETFs. V. Impact of the Pilot on Quoted and Effective Spreads Figures 5–8 graphically illustrate the impact on spreads for the switching options after being added to the Pilot vis-à-vis the control sample. Figure 5 depicts the average dollar effective spreads during the pre-event month and the post-event month across the different addition dates. As can be seen in Figure 5, dollar effective spreads for switching options are substantially lower in the post-event month as compared to the pre-event month. No corresponding decline in effective spreads occurs for the control sample. A similar pattern is observed for relative effective spreads (Figure 6), dollar quoted spreads (Figure 7), and relative quoted spreads (Figure 8). Figures 9–12 show a similar pattern for option classes on ETFs. These figures suggest that inclusion in the Pilot is associated with substantially lower quoted and effective spreads.4 Tables 5–12 present changes in effective and quoted spreads for options that are switching into the Pilot,5 as compared to a control group of non-switching options. Spreads are volume-weighted across different trades in an option series and then equally weighted across option series, in order to obtain spreads for the option-class day. Those spreads are then equally weighted across different days in the pre-event month and the post-event month, respectively, in 4 The graphs shown in Figures 5–8 are based on event-time data aggregated across all event dates. Similar graphs could be made for any individual event date. For example, a graph showing the evolution of spreads surrounding August 2, 2010 is provided in the Appendix. 5 The addition dates in January 2010 and July 2010 are the pre-event months for the additions in February 2010 and August 2010, respectively and, hence, are excluded as addition dates from the analysis to ensure that event windows do not overlap. 9 order to obtain option-class month observations. A similar methodology is adopted for computing spreads for the control sample, and the results of a difference-in-differences specification are reported. P-values are computed using a paired t-test and the Wilcoxon SignedRank test. As shown in the first panel in Table 5, average dollar effective spreads declined from 10.5 cents in the pre-event month to 6.8 cents in the post-event month for the switching options in the overall sample, a decrease of 3.7 cents, while effective spreads in the control sample decreased by 0.2 cents. Relative to the control sample, effective spreads declined by 3.5 cents, as reported in the column labeled “diff-in-diff.” This decline is statistically significant (at the 1% level). Table 5 also reports results for the different subperiods. As indicated in the table, inclusion in the Pilot is associated with a decrease in effective spreads of 3.3 cents for classes added between 2007 and 2009, 3.8 cents for classes added between 2010 and 2011, and 1.4 cents for classes added between 2012 and 2015. The second panel of Table 5 reports analogous results based on percentage effective spreads. Similarly, as shown in the third panel of Table 5, average dollar quoted spreads declined from 13.9 cents in the pre-event month to 8.7 cents in the post-event month for the switching options in the overall sample, while quoted spreads for the control sample decreased from 12.4 to 12.2 cents. Based on the difference-in-differences, inclusion in the Pilot is associated with a decline in quoted spreads of 5.1 cents, which is statistically significant at the 1% level. One potential explanation for the smaller decrease in spreads for later additions to the Pilot is that the benefits of the Pilot are most pronounced for options on larger stocks or for option classes with the highest trading volume, and to the extent that recent additions to the Pilot 10 tend to be smaller stocks with lower-volume options, there would be smaller declines in spreads in recent years. To examine this, Table 6 decomposes the sample into categories based on the underlying market capitalization, using breakpoints calculated from NYSE stocks. Because most options being added are in the largest market capitalization quartile, they are decomposed into more granular categories. The difference-in-differences spreads are negative and statistically significant for all categories, with the Wilcoxon Signed-Rank test significant at the 1% level. Average dollar effective spreads declined by 3.5 cents for the largest quartile, by 3.6 cents for the third quartile, and by 2.9 cents for options below the 50th percentile, vis-à-vis the changes in the control group. Thus, the spread declines for Pilot stocks are consistent across all market cap categories. In addition, all four spread measures show similar results. Table 7 decomposes the sample based on the percentile of the option volume in the preevent month. Because almost the entire population of the switching options is in the top 10% by volume, they are decomposed into more granular categories. The difference-in-differences spreads are negative and statistically significant for all categories, with the Wilcoxon SignedRank test significant at the 1% level. Relative effective spreads declined by 4.4% for the top two percentiles, by 6% for the 95th to 97th percentile, by 5.5% for the 90th to 94th percentile, and by 7.2% for options below the 90th percentile, vis-à-vis changes in the control groups. The spread declines for Pilot option classes are consistent across all volume categories for all four spread measures. Table 8 decomposes the sample based on the quoted price for an option. The differencein-differences spreads are negative and statistically significant for all categories, with the Wilcoxon Signed-Rank test significant at the 1% level. Average dollar effective spreads 11 declined by 2.7 cents for options priced below $1.00, by 2.9 cents for options priced between $1.00 and $3.00, by 4.2 cents for options priced between $3.00 and $5.00, and by 4.6 cents for options priced over $5.00, vis-à-vis the changes in the control group. The spread declines for Pilot option classes are consistent across all price categories for all four spread measures. Table 9 decomposes the sample based on the time to expiration for an option. The difference-in-differences spreads are negative and statistically significant for all categories, with the Wilcoxon Signed-Rank test significant at the 1% level. Average dollar effective spreads declined by 3.4 cents for options expiring within a week, by 3 cents for options expiring between one and four weeks, and by 3.6 cents for options expiring in more than four weeks, vis-à-vis the changes in the control group. The spread declines for Pilot option classes are consistent across all expiration categories for all four spread measures. Tables 10–12 show results for option classes on ETFs decomposed by addition year, underlying market capitalization (as measured by price multiplied by shares outstanding), and option volume. Overall, average dollar effective spreads declined by 5 cents and average dollar quoted spreads declined by 6.8 cents. When decomposed by the market capitalization of the underlying ETF or by option trading volume, all difference-in-differences spreads are negative and statistically significant at the 1% level for the Wilcoxon Signed-Rank test. The difference-in-differences analysis described above has focused on examining the impact of the Pilot on effective spreads and quoted spreads. The same technique can also be applied to examine other market characteristics. For example, analysis showing the impact on average daily trading volume, average trade size, and quoted depth at the NBBO is presented in the Appendix. 12 VI. Regression Analysis The difference-in-differences analysis reported in the previous section used a control- sample methodology to control for any market-wide difference in factors that might have affected spreads between the pre-event and post-event months. This section presents further results based on a multivariate regression methodology that further controls for changes in other factors that might affect spreads, including option volume, stock volume, and equity volatility. A. Baseline Regression Specification (Contains All Options) The baseline multivariate regression approach is estimated at the class-day level for periods covering a calendar month prior to, and a calendar month subsequent to, each date of addition to the Pilot and contains all traded option classes: , , where , particular day; , , , , is the binary variable of interest, taking a value of 1 in the post-switch , is the log of option class volume; is the log of underlying stock volume on the , is the underlying stock volatility calculated as the difference between the high and low prices of the day divided by the closing price; , is a measure of quoted or effective spreads for a particular option class on a period for options switching to the Pilot; day; , is an option class fixed effect; and The variable of interest , is a date fixed effect. is the interaction term between indicator variables for the switching options and the post-switch period. The specification does not include individual 13 (main effect) indicator variables for switching options and the post-switch period because these are subsumed by the option class and date fixed effects. The model is estimated on observations at the class/day level, and the dependent variable is constructed by aggregating spread measures across the option series within the same class. The spreads are first volume-weighted across trades within each option series-day and then equally weighted across option series to obtain option class-day spreads. Hence, this specification incorporates all option series within the option classes with positive trading volume. The model is estimated on a sample including all option class/day measures for the calendar month prior to, and the calendar month after, each date of addition to the Pilot for all options. Standard errors are clustered on option class and date. B. Matched Sample Regression Specification (Contains Only Matched Sample) We also estimate an alternative specification, which has three key differences with the baseline specification. First, the alternate specification contains only the matched sample for each event, where an event constitutes a pre-event and post-event month for an addition. Second, the variable of interest is a switching indicator (which takes on a value of 1) only in the post-event month for the switching options. This indicator is zero for the control options, regardless of whether they are in the Pilot or not. Third, the option class fixed effect is replaced with an option class event fixed effect, since the same control option may be outside the Pilot for a particular event and may be in the Pilot for another event. 14 C. Findings Table 13 reports results for effective spreads using the baseline specification estimated over the pre-event month and post-event month for the full sample, as well as for the different time periods. The indicator variable of interest is negative and statistically significant (at the 1% level) for effective spreads (for the full sample and for all time periods, except for the most recent additions in 2012–2015), showing a decline in trading costs for options being added to the Pilot. Dollar effective spreads declined by an average of 8.8 cents after addition to the Pilot for the full sample. Comparing the different subperiods separately, the maximum decline in spreads is for the additions in the 2010–2011 period (8 cents). The indicator is not statistically significant for the most recent additions from 2012–2015, with a coefficient close to zero. Similarly, Table 14 reports results for quoted spreads using the baseline multivariate regression framework. Dollar quoted spreads declined by 16.1 cents for the entire sample, which is statistically significant. Comparing the subperiods individually, the decline is strongest in the 2010–2011 subperiod (12.2 cents), and is not statistically significant for additions made in the 2012–2015 subperiod. Table 15 reports regression results for effective spreads using the matched sample approach, for the complete time period as well as for different subperiods. Dollar effective spreads declined by 3.6 cents for the full sample, which is statistically significant at the 1% level. The coefficient of interest (i.e., switching indicator) is statistically significant and negative across all specifications, including the 2012–2015 subperiod. Similar results are reported in Table 16 for quoted spreads, with dollar quoted spreads declining by 5.2 cents for the full sample, which is statistically significant at the 1% level. 15 Table 17 reports regression results for effective spreads using the matched sample approach, decomposed into different market capitalization categories. The coefficient of interest (i.e., switching indicator) is statistically significant and negative across all categories. Similar results are reported in Table 18 for quoted spreads. Table 19 reports regression results for effective spreads using the matched sample approach, decomposed into different categories based on option volume. The coefficient of interest (i.e., switching indicator) is statistically significant and negative across all categories. Similar results are reported in Table 20 for quoted spreads. Table 21 reports regression results for option classes on ETFs using the full sample and matched sample approach. Similar to the common stock sample, the results show that switching to the Penny Pilot has a significant (at the 5% level) negative effect on quoted spreads. For effective spreads, we find similar negative effects (significant at the 1% level), with the exception of the effective dollar specification for the full ETF sample. VII. Impact of Pilot on the Least Liquid Option Classes Based on the results reported above, we observe a decline in spreads for option classes in the Pilot vis-à-vis the control options, which is robust across different spread measures, as well as different partitions based on market capitalization, option volume, etc. This does not necessarily imply that all option classes would benefit from inclusion in the Pilot because, as noted above, the Pilot option classes are not representative of the overall population of option classes, but tend to be the most liquid. Many option classes currently not in the Pilot have lower 16 trading volume than those currently in the Pilot. It is not clear the extent to which similar benefits might be realized should penny quoting be expanded to include such option classes. With the passage of time, some Pilot option classes (which may have had high trading volume at the time of inclusion) may have become less active, to the point that they would no longer be selected for the Pilot if the decision were made today. Among the Pilot option classes, those with the lowest current volume and market capitalization are the most similar to the options outside the Pilot. Analysis of these options could provide insight into the benefits that might be experienced by less liquid options upon inclusion. Table 22 provides characteristics of Pilot option classes as well as matched control options as of February 2016. Control samples were constructed by matching Pilot options with non-Pilot options on the basis of option class volume, underlying market capitalization, and underlying price.6 To ensure robustness, control samples were designed so that the matching was completed with replacement (i.e., an out-of-Pilot option class can match with any number of in-Pilot option classes), as well as without replacement (i.e., an out-of-Pilot option class can match with only one in-Pilot option class). Even with the passage of time, Pilot options are more liquid than the overall option universe, with the top quartile of Pilot options by option volume in the top three percentiles of the overall universe. Moreover, even the smallest Pilot option classes have option volumes greater than the volume of the 40th percentile in the overall option class 6 Each Pilot option class was matched with a control option outside the Pilot by rank ordering the entire universe of traded options on option class volume, underlying market capitalization, and underlying price as of February 2016, and then minimizing the difference in ranks between the Pilot option and the control option. 17 universe; hence, the identification of the impact of inclusion of option classes below the 40th percentile is not possible using this sample. Table 23 analyzes the difference in spreads between the Pilot option classes and the control options as of February 2016.7 Results are reported by option volume quartiles to analyze if there is a discontinuity at which point the benefits of being in the Pilot taper off. Analyzing the results across the different quartiles, the difference in spreads is negative and mostly statistically significant for the top two quartiles. Hence, consistent with the difference-indifferences analysis, the Pilot appears to be beneficial for the top two quartiles of Pilot options. The top two quartiles are in the 95th percentile of the overall option universe. Thus, these results show that the penny tick size is associated with the benefit of narrower spreads for option classes in the top 5% of option volume.8 Analyzing the difference in spreads for the bottom two quartiles, the test statistics are negative, but most are not statistically significant, suggesting that the benefits of the Pilot decline as option liquidity declines. However, the absence of evidence that market quality has deteriorated suggests that inclusion of lower-volume option classes may not be not harmful. VIII. Conclusion This research has examined data covering the entire history of the Option Penny Pilot from its inception and has analyzed how inclusion in the Pilot has impacted effective spreads and 7 Note that this is a difference in spreads specification, rather than the difference-in-differences specification used previously. 8 We note two limitations of our analysis–one, the control sample of options have significantly lower volume than the Penny Pilot options since most of the high volume options are in the Pilot, and two, that our analysis is limited to liquidity metrics that can be calculated using available data. For example, we are unable to comment on the impact of the Pilot on overall trading costs faced by institutions with large orders. 18 quoted spreads for option classes added to the Pilot through January 2016. The results indicate that inclusion in the Pilot is associated with a statistically significant decline in effective spreads and quoted spreads. This result is found to hold across all subperiods, but the magnitude of the effect appears to be smaller for additions after 2012. Results are presented for options with varying levels of trading volume and underlying market capitalization and appear to be robust across categories. The results presented above focus on options on common stock, although similar results are found for ETF options as discussed above. Similar results are found for complex trades and are presented in the Appendix. The impact of inclusion in the Pilot on other dimensions of market quality, such as quoted depth, are also presented in the Appendix. This research further seeks to provide evidence to assist the staff in evaluating whether the program should be expanded (or contracted) by examining the spreads of Pilot option classes vis-à-vis matched controls as of February 2016. The results show a benefit of narrower spreads for option classes in the top 5% of the universe. However, there is less less evidence of benefit for lower-volume option classes. We find no evidence of a harmful increase in spreads for any category of option classes. In summary, the evidence suggests that the existing Pilot program has resulted in improvements in market quality (as measured by quoted and effective spreads) for the Pilot option classes. This research does not provide any clear evidence that expanding the Pilot to include lower-volume stocks would result in similar benefits. It is worth noting that this research does not account for the different fee structure option exchanges have for classes within and outside the Pilot. It is common among exchanges to have separate fee structures for Penny Pilot options. The research summarized herein does not attempt to disentangle whether the observed improvements in market quality can be attributed to 19 the Pilot alone, or if they may also be influenced by the differential fee structure. The average declines in execution costs for the most liquid option classes appear to be substantially higher than the potential impact of any fee adjustments. 20 Figure 1 Average Daily Option Class Volume vs. Market Capitalization February 2016 Log Average 10 Option Class Volume 6 5 4 3 2 Not in Pilot In Pilot 1 0 -1 -2 7 7.5 8 Source: LiveVol; OptionMetrics; CRSP. 8.5 9 9.5 10 10.5 11 11.5 Log10 Market Capitalization Note: Includes all option classes on common stock for which LiveVol has data in February 2016. Share codes 10 and 11 are used to identify common stock in the CRSP data. 12 Figure 2 Average Daily Underlying Volume vs. Market Capitalization February 2016 Log Average 10 Underlying Volume 8.5 8 7.5 7 6.5 6 5.5 Not in Pilot 5 In Pilot 4.5 4 3.5 3 7 7.5 8 Source: LiveVol; OptionMetrics; CRSP. 8.5 9 9.5 10 10.5 11 11.5 Log10 Market Capitalization Note: Includes all option classes on common stock for which LiveVol has data in February 2016. Share codes 10 and 11 are used to identify common stock in the CRSP data. 12 Figure 3 Average Daily Option Class Volume vs. Market Capitalization Option Classes on ETFs Log Average Option Class Volume February 2016 10 8 7 6 5 4 Not in Pilot In Pilot 3 2 1 0 6 7 Source: LiveVol; OptionMetrics; CRSP. 8 9 10 11 Log10 Market Capitalization Note: Includes all option classes on ETFs for which LiveVol has data in February 2016. Share code 73 is used to identify ETFs in the CRSP data. 12 Figure 4 Average Daily Underlying Volume vs. Market Capitalization Option Classes on ETFs Log Average Underlying Volume February 2016 10 10 9 8 7 6 Not in Pilot In Pilot 5 4 3 6 7 Source: LiveVol; OptionMetrics; CRSP. 8 9 10 11 Log10 Market Capitalization Note: Includes all option classes on ETFs for which LiveVol has data in February 2016. Share code 73 is used to identify ETFs in the CRSP data. 12 Figure 5 Impact of Addition to the Penny Pilot on Effective Spreads ($) Effective Spread $0.14 Penny Pilot Addition $0.12 $0.10 $0.08 $0.06 Switching Control $0.04 $0.02 $0.00 Pre-Addition Month Post-Addition Month Source: LiveVol; OptionMetrics, CRSP. Note: Includes 235 option classes on common stock that were added to the Penny Pilot between January 26, 2007 and July 6, 2015 for which LiveVol has data. 12 option classes were removed because the switching option class or the control option class was missing data on an option class-day in the pre-addition or post-addition month. Each switching option class is matched with a non-switching option class outside the Pilot based on underlying market capitalization and option volume. Effective spreads for the switching and control samples are averaged across each trading day. Figure 6 Impact of Addition to the Penny Pilot on Effective Spreads (%) Effective Spread 20% Penny Pilot Addition 16% 12% 8% Switching Control 4% 0% Pre-Addition Month Post-Addition Month Source: LiveVol; OptionMetrics, CRSP. Note: Includes 235 option classes on common stock that were added to the Penny Pilot between January 26, 2007 and July 6, 2015 for which LiveVol has data. 12 option classes were removed because the switching option class or the control option class was missing data on an option class-day in the pre-addition or post-addition month. Each switching option class is matched with a non-switching option class outside the Pilot based on underlying market capitalization and option volume. Effective spreads for the switching and control samples are averaged across each trading day. Figure 7 Impact of Addition to the Penny Pilot on Quoted Spreads ($) Quoted Spread $0.18 Penny Pilot Addition $0.15 $0.12 $0.09 Switching $0.06 Control $0.03 $0.00 Pre-Addition Month Post-Addition Month Source: LiveVol; OptionMetrics, CRSP. Note: Includes 235 option classes on common stock that were added to the Penny Pilot between January 26, 2007 and July 6, 2015 for which LiveVol has data. 12 option classes were removed because the switching option class or the control option class was missing data on an option class-day in the pre-addition or post-addition month. Each switching option class is matched with a non-switching option class outside the Pilot based on underlying market capitalization and option volume. Quoted spreads for the switching and control samples are averaged across each trading day. Figure 8 Impact of Addition to the Penny Pilot on Quoted Spreads (%) Quoted Spread 21% Penny Pilot Addition 18% 15% 12% 9% Switching Control 6% 3% 0% Pre-Addition Month Post-Addition Month Source: LiveVol; OptionMetrics, CRSP. Note: Includes 235 option classes on common stock that were added to the Penny Pilot between January 26, 2007 and July 6, 2015 for which LiveVol has data. 12 option classes were removed because the switching option class or the control option class was missing data on an option class-day in the pre-addition or post-addition month. Each switching option class is matched with a non-switching option class outside the Pilot based on underlying market capitalization and option volume. Quoted spreads for the switching and control samples are averaged across each trading day. Figure 9 Impact of Addition to the Penny Pilot on Effective Spreads ($) Option Classes on ETFs Effective Spread $0.16 Penny Pilot Addition $0.14 $0.12 $0.10 $0.08 $0.06 Switching Control $0.04 $0.02 $0.00 Pre-Addition Month Post-Addition Month Source: LiveVol; OptionMetrics, CRSP. Note: Includes 53 option classes on ETFs that were added to the Penny Pilot between January 26, 2007 and January 5, 2016 for which LiveVol has data. Two option classes were removed because the switching option class or the control option class was missing data on an option class-day in the pre-addition or post-addition month. Each switching option class is matched with a non-switching option class outside the Pilot based on underlying market capitalization and option volume. Effective spreads for the switching and control samples are averaged across each trading day. Figure 10 Impact of Addition to the Penny Pilot on Effective Spreads (%) Option Classes on ETFs Effective Spread 20% Penny Pilot Addition 16% 12% 8% Switching Control 4% 0% Pre-Addition Month Post-Addition Month Source: LiveVol; OptionMetrics, CRSP. Note: Includes 53 option classes on ETFs that were added to the Penny Pilot between January 26, 2007 and January 5, 2016 for which LiveVol has data. Two option classes were removed because the switching option class or the control option class was missing data on an option class-day in the pre-addition or post-addition month. Each switching option class is matched with a non-switching option class outside the Pilot based on underlying market capitalization and option volume. Effective spreads for the switching and control samples are averaged across each trading day. Figure 11 Impact of Addition to the Penny Pilot on Quoted Spreads ($) Option Classes on ETFs Quoted Spread $0.24 Penny Pilot Addition $0.21 $0.18 $0.15 $0.12 $0.09 Switching Control $0.06 $0.03 $0.00 Pre-Addition Month Post-Addition Month Source: LiveVol; OptionMetrics, CRSP. Note: Includes 53 option classes on ETFs that were added to the Penny Pilot between January 26, 2007 and January 5, 2016 for which LiveVol has data. Two option classes were removed because the switching option class or the control option class was missing data on an option class-day in the pre-addition or post-addition month. Each switching option class is matched with a non-switching option class outside the Pilot based on underlying market capitalization and option volume. Quoted spreads for the switching and control samples are averaged across each trading day. Figure 12 Impact of Addition to the Penny Pilot on Quoted Spreads (%) Option Classes on ETFs Quoted Spread 24% Penny Pilot Addition 21% 18% 15% 12% 9% Switching Control 6% 3% 0% Pre-Addition Month Post-Addition Month Source: LiveVol; OptionMetrics, CRSP. Note: Includes 53 option classes on ETFs that were added to the Penny Pilot between January 26, 2007 and January 5, 2016 for which LiveVol has data. Two option classes were removed because the switching option class or the control option class was missing data on an option class-day in the pre-addition or post-addition month. Each switching option class is matched with a non-switching option class outside the Pilot based on underlying market capitalization and option volume. Quoted spreads for the switching and control samples are averaged across each trading day. Table 1 Option Classes Added to Penny Pilot Since Inception Date New Option Classes Added (%) 1/26/2007 9/28/2007 3/28/2008 11/2/2009 1/5/2010 2/1/2010 5/3/2010 7/6/2010 8/2/2010 1/4/2011 7/6/2011 1/4/2012 7/3/2012 1/3/2013 7/3/2013 1/3/2014 7/3/2014 1/5/2015 7/6/2015 1/5/2016 7/6/2016 Total 13 22 23 75 4 75 75 3 75 2 4 3 2 9 2 7 4 2 6 2 7 415 3.19% 5.39% 5.64% 18.38% 0.98% 18.38% 18.38% 0.74% 18.38% 0.49% 0.98% 0.74% 0.49% 2.21% 0.49% 1.72% 0.98% 0.49% 1.47% 0.49% 1.69% 100.00% Source: ISE Penny Pilot Addition Dates. Table 2 Liquidity Metrics for Penny Pilot Addition Dates Option Classes on Common Stock Daily Volume of Option Class (Contracts) Number of Option Classes Month Not in Pilot Switching Dec-06 2,030 9 Aug-07 2,011 Feb-08 In Pilot Not in Pilot Switching 0 1,636 32,572 15 9 1,843 2,001 20 25 Oct-09 1,890 41 Dec-09 1,950 Jan-10 Daily Volume of Underlying Stock (Thousands) In Pilot Not in Pilot Switching – 1,390 26,137 51,330 29,632 1,983 1,481 30,794 48,095 43 1,177 22,411 3 85 755 1,823 50 87 Apr-10 1,839 49 Jul-10 1,767 Dec-10 In Pilot Market Cap of Underlying Stock ($Millions) Not in Pilot Switching In Pilot – 6,920 102,942 – 22,195 35,759 6,341 94,746 106,900 1,684 21,527 30,027 4,951 88,186 80,364 65,407 1,596 17,257 39,943 3,144 43,505 68,857 10,000 33,977 1,205 11,925 23,211 3,365 23,018 60,045 866 9,080 44,974 1,260 8,250 30,600 2,719 22,664 57,192 140 652 7,528 35,862 1,281 6,237 23,736 2,881 10,254 49,019 46 180 457 3,807 20,062 1,042 5,379 15,530 2,361 13,425 36,905 1,790 1 224 477 4,869 18,171 838 8,813 10,840 2,763 209 36,900 Jun-11 1,824 3 225 502 15,136 15,679 960 7,886 10,004 2,902 20,199 38,065 Dec-11 1,888 1 233 381 11,989 14,393 878 4,695 9,122 2,637 5,077 35,131 Jun-12 1,899 2 233 502 15,814 15,015 976 18,695 9,575 2,781 9,861 38,136 Dec-12 1,885 5 225 378 40,885 16,414 764 16,823 8,422 2,892 12,502 40,393 Jun-13 1,989 1 233 486 64,427 15,264 865 9,097 9,000 3,276 13,037 43,755 Dec-13 2,047 3 226 567 16,306 16,847 773 5,198 7,072 3,809 6,630 50,908 Jun-14 2,144 1 227 505 123,725 15,879 803 31,263 6,311 3,951 24,170 52,975 Dec-14 2,187 1 229 437 8,256 16,487 821 5,921 7,014 4,003 26,587 55,218 Jun-15 2,206 2 227 391 18,684 13,805 830 7,078 6,817 4,035 6,374 55,257 Source: CRSP; OptionMetrics; LiveVol. Note: Liquidity metrics are shown for the month prior to each addition date. The liquidity metrics includes all option classes on common stock for which LiveVol has data. Share codes 10 and 11 are used to identify common stock in the CRSP data. The sample excludes option classes for which the underlying stock traded below $1 or above $1,000 on any day on which an average spread is calculated during the December 2006 through February 2016 period. Data for the July 2010 and January 2016 additions is not shown above because none of the option classes that switched on those dates are in the sample of option classes on common stock. Table 3 Liquidity Metrics for Penny Pilot Addition Dates Matched Pairs Sample Daily Volume of Option Class (Contracts) Daily Volume of Underlying Stock (Thousands) Market Cap of Underlying Stock ($Millions) Month Number of Option Classes Switching Unconstrained Constrained Switching Unconstrained Constrained Switching Unconstrained Constrained Dec-06 9 32,572 27,896 27,896 26,137 18,426 18,426 102,942 76,960 76,960 Aug-07 15 51,330 36,314 36,353 22,195 27,659 18,002 94,746 101,936 85,218 Feb-08 20 30,794 44,490 22,451 21,527 31,756 16,848 88,186 85,362 65,385 Oct-09 41 22,411 23,793 11,851 17,257 17,117 9,666 43,505 37,261 25,440 Jan-10 50 9,080 9,246 6,915 8,250 7,668 5,598 22,664 18,788 14,558 Apr-10 46 7,990 9,654 5,705 6,271 7,387 7,463 10,010 10,163 9,934 Jul-10 46 3,807 3,853 3,241 5,379 5,516 3,930 13,425 13,119 11,582 Dec-10 1 4,869 1,793 1,793 8,813 1,993 1,993 209 259 259 Jun-11 3 15,136 14,755 8,719 7,886 12,246 2,248 20,199 20,167 11,981 Dec-11 1 11,989 15,117 6,524 4,695 11,795 3,703 5,077 5,099 4,783 Jun-12 2 15,814 11,767 11,767 18,695 6,119 6,119 9,861 9,777 9,777 Dec-12 5 40,885 37,142 8,880 16,823 17,370 4,000 12,502 13,173 10,139 Jun-13 1 64,427 37,025 9,730 9,097 3,079 2,784 13,037 12,438 9,251 Dec-13 3 16,306 15,206 9,946 5,198 4,131 4,420 6,630 6,930 7,677 Jun-14 1 123,725 59,340 26,590 31,263 2,402 9,795 24,170 26,476 33,033 Dec-14 1 8,256 8,265 7,583 5,921 8,410 8,833 26,587 29,393 28,724 Jun-15 2 18,684 25,054 8,856 7,078 13,617 23,484 6,374 6,202 6,616 Source: CRSP; OptionMetrics; LiveVol. Note: Liquidity metrics are shown for the month prior to each addition date. The matched pairs sample is constructed from the universe of option classes on common stock for which LiveVol has data. Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. For “constrained” matching, the non-switching class must be outside of the Pilot. Data for the January 2010 and July 2010 additions are not shown above because the post-month for these two addition dates overlapped with the February 1, 2010 and August 2, 2010 additions respectively. Data for the January 2016 additions is not shown above because none of the option classes that switched on that date are in the sample of option classes on common stock. Table 4 Liquidity Metrics for Penny Pilot Addition Dates Matched Pairs Sample: Option Classes on ETFs Daily Volume of Option Class (Contracts) Daily Volume of Underlying Stock (Thousands) Market Cap of Underlying Stock ($Millions) Month Number of Option Classes Switching Unconstrained Constrained Switching Unconstrained Constrained Switching Unconstrained Constrained Dec-06 3 140,034 77,111 63,380 50,208 22,732 21,345 10,224 23,872 24,586 Aug-07 4 230,200 208,085 208,085 101,194 49,351 49,351 22,471 9,615 9,615 Feb-08 1 43,739 584,226 584,226 22,226 151,137 151,137 25,362 16,420 16,420 Oct-09 19 27,803 90,613 6,741 24,030 32,762 8,190 6,404 8,236 2,567 Jan-10 6 10,953 9,705 8,186 17,443 9,969 5,050 1,811 2,324 2,473 Apr-10 7 5,283 6,152 2,920 7,414 7,624 3,770 2,368 2,462 2,083 Jul-10 6 1,727 2,390 1,696 3,552 3,273 2,817 1,190 1,123 1,047 Dec-10 0 – – – – – – – – – Jun-11 0 – – – – – – – – – Dec-11 0 – – – – – – – – – Jun-12 0 – – – – – – – – – Dec-12 1 15,267 6,892 6,685 7,671 3,712 1,399 726 763 767 Jun-13 0 – – – – – – – – – Dec-13 2 16,713 10,133 7,237 7,116 3,259 2,045 6,446 6,666 7,653 Jun-14 0 – – – – – – – – – Dec-14 0 – – – – – – – – – Jun-15 3 10,538 12,301 11,827 7,536 5,672 3,882 5,606 5,249 7,690 Dec-15 1 8,011 12,763 4,426 1,600 834 3,386 400 340 464 Source: CRSP; OptionMetrics; LiveVol. Note: Liquidity metrics are shown for the month prior to each addition date. The matched pairs sample is constructed from the universe of ETFs for which LiveVol has data. Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. For “constrained” matching, the non-switching class must be outside of the Pilot. Data for the January 2010 and July 2010 additions are not shown above because the post-month for these two addition dates overlapped with the February 1, 2010 and August 2, 2010 additions respectively. Table 5 Univariate Statistics Reported by Penny Pilot Addition Date Periods Unconstrained Matching Switching Addition Dates N Average Daily Average Daily Trade Count Volume Pre Post Change Non-Switching P-Value Pre Post Change P-Value Difference-in-Differences Wilcoxon Diff-in-Diff T-Test Signed-Rank Effective Spread ($) All 247 912 16,940 0.105 0.068 -0.037 0.000 0.096 0.094 -0.002 0.195 -0.035 0.000 0.000 2007 – 2009 2010 – 2011 85 146 1,363 443 30,563 7,181 0.109 0.098 0.066 0.062 -0.042 -0.036 0.000 0.000 0.101 0.090 0.093 0.093 -0.009 0.002 0.000 0.213 -0.033 -0.038 0.000 0.000 0.000 0.000 2012 – 2015 16 2,795 33,618 0.144 0.129 -0.015 0.011 0.122 0.120 -0.001 0.779 -0.014 0.019 0.009 Effective Spread (%) All 247 912 16,940 0.138 0.090 -0.048 0.000 0.113 0.122 0.009 0.004 -0.058 0.000 0.000 2007 – 2009 2010 – 2011 2012 – 2015 85 146 16 1,363 443 2,795 30,563 7,181 33,618 0.140 0.132 0.179 0.085 0.087 0.138 -0.055 -0.046 -0.041 0.000 0.000 0.000 0.113 0.111 0.131 0.116 0.126 0.122 0.004 0.015 -0.009 0.252 0.004 0.223 -0.058 -0.060 -0.032 0.000 0.000 0.003 0.000 0.000 0.006 0.124 0.122 0.118 0.180 0.122 0.113 0.122 0.176 -0.001 -0.009 0.004 -0.004 0.531 0.000 0.203 0.613 -0.051 -0.047 -0.055 -0.040 0.000 0.000 0.000 0.003 0.000 0.000 0.000 0.005 0.138 0.130 0.138 0.175 0.149 0.136 0.156 0.165 0.012 0.006 0.018 -0.010 0.002 0.098 0.003 0.275 -0.079 -0.074 -0.083 -0.063 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.003 Quoted Spread ($) All 2007 – 2009 2010 – 2011 2012 – 2015 247 85 146 16 912 1,363 443 2,795 16,940 30,563 7,181 33,618 0.139 0.136 0.131 0.230 0.087 0.080 0.080 0.186 -0.053 -0.056 -0.052 -0.043 0.000 0.000 0.000 0.000 Quoted Spread (%) All 2007 – 2009 2010 – 2011 2012 – 2015 247 85 146 16 912 1,363 443 2,795 16,940 30,563 7,181 33,618 0.173 0.165 0.169 0.256 0.106 0.096 0.104 0.183 -0.067 -0.069 -0.065 -0.073 0.000 0.000 0.000 0.000 Source: LiveVol; OptionMetrics; CRSP. Note: Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Pilot addition dates 1/26/07, 9/28/07, 3/28/08, and 11/2/09 are included in the 2007 – 2009 addition date period; Pilot addition dates 2/1/10, 5/3/10, 8/2/10, 1/4/11, and 7/6/11 are included in the 2010 – 2011 period; and Pilot addition dates 1/4/12, 7/3/12, 1/3/13, 7/3/13, 1/3/14, 7/3/14, 1/5/15, and 7/6/15 are included in the 2012 – 2015 period. The average daily volume and average daily trade count are calculated on a per symbol basis and are calculated using the month prior to the month the option class was added to the Pilot (the "pre" month). Table 6 Univariate Statistics Reported by Underlying Market Capitalization Unconstrained Matching Switching Market Cap Percentile N Average Daily Average Daily Trade Count Volume Pre Post Change Non-Switching P-Value Pre Post Change P-Value Difference-in-Differences Wilcoxon Diff-in-Diff T-Test Signed-Rank Effective Spread ($) th 95 + 75th – 94th 50th – 74th Below 50th 69 123 1,279 811 30,296 12,444 0.102 0.107 0.061 0.071 -0.041 -0.036 0.000 0.000 0.085 0.106 0.079 0.106 -0.006 0.000 0.012 0.954 -0.035 -0.035 0.000 0.000 0.000 0.000 38 17 780 449 11,117 8,279 0.106 0.095 0.069 0.066 -0.037 -0.029 0.000 0.001 0.085 0.093 0.084 0.093 -0.001 0.000 0.874 0.941 -0.036 -0.029 0.000 0.003 0.000 0.004 0.098 0.109 0.132 0.160 0.101 0.111 0.158 0.214 0.003 0.002 0.026 0.054 0.281 0.504 0.040 0.083 -0.060 -0.047 -0.077 -0.088 0.000 0.000 0.000 0.011 0.000 0.000 0.000 0.001 0.104 0.137 0.116 0.124 0.099 0.139 0.113 0.122 -0.005 0.002 -0.003 -0.003 0.059 0.479 0.655 0.586 -0.050 -0.053 -0.053 -0.041 0.000 0.000 0.000 0.001 0.000 0.000 0.000 0.002 0.114 0.133 0.167 0.200 0.119 0.136 0.197 0.263 0.005 0.003 0.029 0.062 0.103 0.284 0.048 0.085 -0.078 -0.067 -0.104 -0.112 0.000 0.000 0.000 0.009 0.000 0.000 0.000 0.001 Effective Spread (%) th 95 + 75th – 94th 50th – 74th Below 50th 69 123 38 17 1,279 811 780 449 30,296 12,444 11,117 8,279 0.132 0.128 0.163 0.176 0.075 0.084 0.112 0.142 -0.057 -0.045 -0.051 -0.035 0.000 0.000 0.000 0.020 Quoted Spread ($) th 95 + 75th – 94th 50th – 74th Below 50th 69 123 38 17 1,279 811 780 449 30,296 12,444 11,117 8,279 0.130 0.143 0.151 0.130 0.074 0.092 0.094 0.086 -0.056 -0.051 -0.057 -0.043 0.000 0.000 0.000 0.000 Quoted Spread (%) th 95 + th th 75 – 94 th 50 – 74th Below 50th 69 123 38 17 1,279 811 780 449 30,296 12,444 11,117 8,279 0.158 0.162 0.211 0.226 0.085 0.099 0.136 0.176 -0.073 -0.063 -0.074 -0.050 0.000 0.000 0.000 0.011 Source: LiveVol; OptionMetrics; CRSP. Note: Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Matched pairs of switching and non-switching option classes are categorized into market capitalization percentiles using the underlying market capitalization of the switching option class at the end of the month prior to the addition date. Market capitalization percentiles are defined using the stocks listed on the NYSE. The average daily volume and average daily trade count are calculated on a per symbol basis and are calculated using the month prior to the month the option class was added to the Pilot (the "pre" month). Table 7 Univariate Statistics Reported by Option Class Volume Unconstrained Matching Switching Option Volume Percentile N Average Daily Average Daily Trade Count Volume Pre Post Change Non-Switching P-Value Pre Post Change P-Value Difference-in-Differences Wilcoxon Diff-in-Diff T-Test Signed-Rank Effective Spread ($) th 98 + 95th – 97th 90th – 94th Below 90th 49 77 2,461 869 48,820 15,309 0.129 0.105 0.089 0.064 -0.041 -0.041 0.000 0.000 0.102 0.082 0.093 0.077 -0.009 -0.005 0.002 0.011 -0.032 -0.037 0.000 0.000 0.000 0.000 73 48 411 162 6,691 2,600 0.098 0.088 0.064 0.058 -0.034 -0.030 0.000 0.000 0.101 0.106 0.105 0.108 0.004 0.002 0.178 0.620 -0.037 -0.032 0.000 0.000 0.000 0.000 0.108 0.111 0.100 0.142 0.108 0.122 0.107 0.162 0.000 0.011 0.008 0.020 0.989 0.138 0.021 0.067 -0.044 -0.060 -0.055 -0.072 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.124 0.105 0.134 0.138 0.115 0.100 0.139 0.139 -0.009 -0.005 0.006 0.002 0.007 0.018 0.160 0.748 -0.047 -0.055 -0.055 -0.044 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.124 0.135 0.126 0.174 0.125 0.149 0.135 0.197 0.001 0.014 0.009 0.024 0.774 0.096 0.013 0.056 -0.059 -0.083 -0.075 -0.096 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Effective Spread (%) th 98 + 95th – 97th 90th – 94th Below 90th 49 77 73 48 2,461 869 411 162 48,820 15,309 6,691 2,600 0.136 0.135 0.138 0.144 0.092 0.086 0.090 0.092 -0.044 -0.049 -0.048 -0.052 0.000 0.000 0.000 0.000 Quoted Spread ($) th 98 + 95th – 97th 90th – 94th Below 90th 49 77 73 48 2,461 869 411 162 48,820 15,309 6,691 2,600 0.165 0.142 0.134 0.117 0.109 0.082 0.085 0.074 -0.057 -0.060 -0.049 -0.042 0.000 0.000 0.000 0.000 Quoted Spread (%) th 98 + th th 95 – 97 th 90 – 94th Below 90th 49 77 73 48 2,461 869 411 162 48,820 15,309 6,691 2,600 0.163 0.171 0.176 0.182 0.105 0.101 0.109 0.110 -0.058 -0.069 -0.067 -0.072 0.000 0.000 0.000 0.000 Source: LiveVol; OptionMetrics; CRSP. Note: Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Matched pairs of switching and non-switching option classes are categorized into option class volume percentiles using the option class volume of the switching option class during the month prior to the addition date. Option class percentiles are defined using the universe of option classes on common stock in the LiveVol data. The average daily volume and average daily trade count are calculated on a per symbol basis and are calculated using the month prior to the month the option class was added to the Pilot (the "pre" month). Table 8 Univariate Statistics Reported by Quoted Price Unconstrained Matching Switching Quoted Price N < $1 $1 – $3 $3 – $5 > $5 247 247 245 234 Average Daily Average Daily Trade Count Volume Pre Post Change 0.054 0.075 0.122 0.195 0.027 0.046 0.084 0.145 -0.027 -0.029 -0.039 -0.050 Non-Switching P-Value Difference-in-Differences Wilcoxon Diff-in-Diff T-Test Signed-Rank Pre Post Change P-Value 0.044 0.066 0.112 0.189 0.044 0.066 0.115 0.185 0.000 0.000 0.004 -0.004 0.761 0.809 0.099 0.291 -0.027 -0.029 -0.042 -0.046 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.259 0.038 0.030 0.021 0.265 0.038 0.031 0.021 0.006 0.000 0.001 -0.001 0.252 0.899 0.105 0.261 -0.135 -0.018 -0.011 -0.006 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.055 0.082 0.147 0.247 0.055 0.083 0.151 0.249 0.000 0.001 0.004 0.002 0.789 0.454 0.034 0.742 -0.039 -0.043 -0.060 -0.070 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.312 0.048 0.039 0.028 0.318 0.049 0.040 0.028 0.006 0.001 0.001 0.000 0.272 0.206 0.041 0.846 -0.179 -0.026 -0.016 -0.009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Effective Spread ($) 322 307 102 148 7,690 5,496 1,447 1,720 0.000 0.000 0.000 0.000 Effective Spread (%) < $1 $1 – $3 $3 – $5 > $5 247 247 245 234 322 307 102 148 7,690 5,496 1,447 1,720 0.324 0.044 0.033 0.022 0.195 0.027 0.022 0.016 -0.129 -0.018 -0.010 -0.006 < $1 $1 – $3 $3 – $5 > $5 247 247 245 234 322 307 102 148 7,690 5,496 1,447 1,720 0.071 0.098 0.166 0.264 0.032 0.056 0.111 0.195 -0.039 -0.042 -0.055 -0.069 < $1 $1 – $3 $3 – $5 > $5 247 247 245 234 322 307 102 148 7,690 5,496 1,447 1,720 0.401 0.058 0.044 0.031 0.228 0.033 0.029 0.022 -0.173 -0.025 -0.015 -0.009 0.000 0.000 0.000 0.000 Quoted Spread ($) 0.000 0.000 0.000 0.000 Quoted Spread (%) 0.000 0.000 0.000 0.000 Source: LiveVol; OptionMetrics; CRSP. Note: Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Trades for a given option-class are grouped according to the bid and ask price. Instances in which the bid and ask fall into separate groups are excluded from the calculation (2.8% of trades). The average daily volume and average daily trade count are calculated on a per symbol basis and are calculated using the month prior to the month the option class was added to the Pilot (the "pre" month). Table 9 Univariate Statistics Reported by Expiration Date Unconstrained Matching Switching Expiration Date N < 1 week 1 – 2 weeks 2 – 4 weeks +4 weeks 247 246 247 247 Average Daily Average Daily Trade Count Volume Pre Post Change 0.090 0.080 0.078 0.110 0.056 0.048 0.047 0.074 -0.034 -0.031 -0.031 -0.036 Non-Switching P-Value Difference-in-Differences Wilcoxon Diff-in-Diff T-Test Signed-Rank Pre Post Change P-Value 0.082 0.073 0.072 0.101 0.083 0.071 0.071 0.101 0.001 -0.002 -0.001 0.000 0.838 0.377 0.627 0.938 -0.034 -0.030 -0.030 -0.036 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.357 0.260 0.191 0.083 0.364 0.264 0.204 0.087 0.007 0.005 0.014 0.004 0.487 0.594 0.038 0.215 -0.117 -0.130 -0.113 -0.045 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.104 0.092 0.093 0.130 0.107 0.092 0.091 0.131 0.003 0.000 -0.001 0.001 0.414 0.958 0.512 0.728 -0.049 -0.045 -0.044 -0.053 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.401 0.300 0.230 0.104 0.422 0.313 0.243 0.109 0.021 0.013 0.013 0.005 0.054 0.166 0.059 0.190 -0.152 -0.164 -0.141 -0.063 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Effective Spread ($) 133 98 146 535 2,242 1,751 2,541 10,412 0.000 0.000 0.000 0.000 Effective Spread (%) < 1 week 1 – 2 weeks 2 – 4 weeks +4 weeks 247 246 247 247 133 98 146 535 2,242 1,751 2,541 10,412 0.413 0.330 0.246 0.102 0.303 0.205 0.147 0.061 -0.110 -0.125 -0.100 -0.041 < 1 week 1 – 2 weeks 2 – 4 weeks +4 weeks 247 246 247 247 133 98 146 535 2,242 1,751 2,541 10,412 0.118 0.104 0.104 0.148 0.071 0.060 0.059 0.095 -0.047 -0.045 -0.045 -0.052 < 1 week 1 – 2 weeks 2 – 4 weeks +4 weeks 247 246 247 247 133 98 146 535 2,242 1,751 2,541 10,412 0.475 0.388 0.299 0.131 0.344 0.237 0.171 0.073 -0.131 -0.150 -0.128 -0.058 0.000 0.000 0.000 0.000 Quoted Spread ($) 0.000 0.000 0.000 0.000 Quoted Spread (%) 0.000 0.000 0.000 0.000 Source: LiveVol; OptionMetrics; CRSP. Note: Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Trades for a given option-class are grouped according to the time to an option series' expiration. The average daily volume and average daily trade count are calculated on a per symbol basis and are calculated using the month prior to the month the option class was added to the Pilot (the "pre" month). Table 10 Univariate Statistics Reported by Penny Pilot Addition Date Periods Unconstrained Matching Option Classes on ETFs Switching Average Daily Average Trade Count Daily Volume Addition Dates N All 2007 – 2009 2010 – 2011 2012 – 2015 53 27 19 7 1,149 1,889 239 766 All 2007 – 2009 2010 – 2011 2012 – 2015 53 27 19 7 All 2007 – 2009 2010 – 2011 2012 – 2015 All 2007 – 2009 2010 – 2011 2012 – 2015 Pre Post Change 39,965 70,848 5,950 13,169 0.115 0.123 0.105 0.111 0.077 0.073 0.061 0.138 -0.037 -0.050 -0.043 0.027 1,149 1,889 239 766 39,965 70,848 5,950 13,169 0.136 0.120 0.146 0.175 0.099 0.088 0.101 0.138 -0.037 -0.032 -0.045 -0.037 53 27 19 7 1,149 1,889 239 766 39,965 70,848 5,950 13,169 0.154 0.156 0.140 0.183 0.102 0.092 0.078 0.204 -0.052 -0.064 -0.062 0.022 53 27 19 7 1,149 1,889 239 766 39,965 70,848 5,950 13,169 0.183 0.151 0.192 0.281 0.125 0.104 0.126 0.201 -0.058 -0.046 -0.067 -0.080 Non-Switching P-Value Difference-in-Differences Wilcoxon Diff-in-Diff T-Test Signed-Rank Pre Post Change P-Value 0.095 0.099 0.096 0.078 0.107 0.105 0.111 0.106 0.012 0.006 0.016 0.028 0.041 0.420 0.199 0.079 -0.050 -0.056 -0.059 -0.001 0.000 0.000 0.000 0.983 0.000 0.000 0.000 0.297 0.117 0.115 0.118 0.121 0.130 0.132 0.132 0.119 0.013 0.017 0.014 -0.002 0.002 0.003 0.080 0.858 -0.050 -0.049 -0.059 -0.035 0.000 0.000 0.000 0.006 0.000 0.000 0.000 0.031 0.124 0.124 0.127 0.112 0.139 0.133 0.146 0.145 0.016 0.008 0.020 0.033 0.032 0.369 0.173 0.087 -0.068 -0.072 -0.082 -0.012 0.000 0.000 0.000 0.830 0.000 0.000 0.000 0.297 0.152 0.145 0.154 0.173 0.166 0.162 0.171 0.168 0.014 0.017 0.016 -0.005 0.005 0.004 0.085 0.762 -0.072 -0.064 -0.083 -0.075 0.000 0.000 0.000 0.009 0.000 0.000 0.000 0.031 Effective Spread ($) 0.000 0.000 0.000 0.455 Effective Spread (%) 0.000 0.000 0.000 0.000 Quoted Spread ($) 0.000 0.000 0.000 0.684 Quoted Spread (%) 0.000 0.000 0.000 0.000 Source: LiveVol; OptionMetrics; CRSP. Note: Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Pilot addition dates 1/26/07, 9/28/07, 3/28/08, and 11/2/09 are included in the 2007 – 2009 addition date period; Pilot addition dates 2/1/10, 5/3/10, 8/2/10, 1/4/11, and 7/6/11 are included in the 2010 – 2011 period; and Pilot addition dates 1/4/12, 7/3/12, 1/3/13, 7/3/13, 1/3/14, 7/3/14, 1/5/15, and 7/6/15 are included in the 2012 – 2015 period. The average daily volume and average daily trade count are calculated on a per symbol basis and are calculated using the month prior to the month the option class was added to the Pilot (the "pre" month). Table 11 Univariate Statistics Reported by Underlying Market Capitalization Unconstrained Matching Option Classes on ETFs Switching Market Cap Percentile N Average Daily Average Trade Count Daily Volume Pre Post Change Non-Switching P-Value Difference-in-Differences Wilcoxon Diff-in-Diff T-Test Signed-Rank Pre Post Change P-Value 0.081 0.093 0.105 0.085 0.110 0.120 0.004 0.017 0.015 0.519 0.170 0.185 -0.053 -0.058 -0.042 0.016 0.001 0.017 0.000 0.000 0.000 0.095 0.117 0.131 0.108 0.135 0.141 0.012 0.019 0.009 0.044 0.035 0.176 -0.052 -0.052 -0.048 0.000 0.000 0.000 0.000 0.000 0.000 0.104 0.120 0.138 0.105 0.143 0.158 0.001 0.023 0.019 0.888 0.110 0.147 -0.063 -0.080 -0.061 0.007 0.000 0.009 0.000 0.000 0.000 0.119 0.151 0.173 0.131 0.172 0.183 0.012 0.021 0.010 0.056 0.025 0.283 -0.069 -0.075 -0.072 0.000 0.000 0.000 0.000 0.000 0.000 Effective Spread ($) th 14 17 22 2,213 947 628 103,814 24,294 11,443 0.125 0.102 0.118 0.077 0.061 0.091 -0.049 -0.042 -0.027 th 14 17 22 2,213 947 628 103,814 24,294 11,443 0.126 0.128 0.149 0.086 0.095 0.110 -0.040 -0.033 -0.039 th 14 17 22 2,213 947 628 103,814 24,294 11,443 0.158 0.135 0.166 0.096 0.078 0.124 -0.062 -0.057 -0.042 75 + th 50 – 74th Below 50th 0.028 0.000 0.070 Effective Spread (%) 75 + 50 – 74th Below 50th th 0.000 0.000 0.000 Quoted Spread ($) 75 + 50 – 74th Below 50th th 0.009 0.000 0.040 Quoted Spread (%) th 75 + 50th – 74th Below 50th 14 17 22 2,213 947 628 103,814 24,294 11,443 0.165 0.168 0.206 0.107 0.115 0.144 -0.057 -0.053 -0.063 0.000 0.000 0.000 Source: LiveVol; OptionMetrics; CRSP. Note: Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Matched pairs of switching and non-switching option classes are categorized into market capitalization percentiles using the underlying market capitalization of the switching option class at the end of the month prior to the addition date. Market capitalization percentiles are defined using the stocks listed on the NYSE. The average daily volume and average daily trade count are calculated on a per symbol basis and are calculated using the month prior to the month the option class was added to the Pilot (the "pre" month). Table 12 Univariate Statistics Reported by Option Class Volume Unconstrained Matching Option Classes on ETFs Switching Option Volume Percentile N Average Daily Average Trade Count Daily Volume Pre Post Change Non-Switching P-Value Difference-in-Differences Wilcoxon Diff-in-Diff T-Test Signed-Rank Pre Post Change P-Value 0.107 0.075 0.105 0.126 0.081 0.119 0.018 0.006 0.015 0.185 0.361 0.228 -0.055 -0.040 -0.056 0.076 0.000 0.000 0.005 0.000 0.000 0.104 0.121 0.124 0.116 0.136 0.136 0.012 0.015 0.012 0.076 0.038 0.138 -0.048 -0.045 -0.058 0.000 0.000 0.000 0.000 0.000 0.000 0.133 0.102 0.137 0.155 0.108 0.158 0.022 0.006 0.021 0.200 0.454 0.138 -0.062 -0.060 -0.080 0.096 0.000 0.000 0.007 0.000 0.000 0.131 0.158 0.162 0.143 0.170 0.180 0.012 0.012 0.017 0.087 0.142 0.094 -0.063 -0.067 -0.085 0.000 0.000 0.000 0.000 0.000 0.000 Effective Spread ($) th 15 19 19 2,350 1,118 233 111,135 18,709 5,034 0.128 0.114 0.106 0.091 0.079 0.065 -0.036 -0.035 -0.041 th 15 19 19 2,350 1,118 233 111,135 18,709 5,034 0.115 0.141 0.149 0.078 0.111 0.103 -0.037 -0.030 -0.046 th 15 19 19 2,350 1,118 233 111,135 18,709 5,034 0.159 0.162 0.141 0.119 0.108 0.083 -0.040 -0.055 -0.059 95 + th 90 – 94th Below 90th 0.173 0.001 0.000 Effective Spread (%) 95 + 90 – 94th Below 90th th 0.000 0.000 0.000 Quoted Spread ($) 95 + 90 – 94th Below 90th th 0.215 0.000 0.000 Quoted Spread (%) th 95 + 90th – 94th Below 90th 15 19 19 2,350 1,118 233 111,135 18,709 5,034 0.148 0.197 0.196 0.097 0.143 0.128 -0.051 -0.054 -0.067 0.000 0.000 0.000 Source: LiveVol; OptionMetrics; CRSP. Note: Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Matched pairs of switching and non-switching option classes are categorized into option class volume percentiles using the option class volume of the switching option class during the month prior to the addition date. Option class percentiles are defined using the universe of option classes on common stock in the LiveVol data. The average daily volume and average daily trade count are calculated on a per symbol basis and are calculated using the month prior to the month the option class was added to the Pilot (the "pre" month). Table 13 Penny Pilot Regression Results[1] Impact on Effective Spreads Option Classes on Common Stock [2] Dec. 2006 – Dec. 2009 [3] Jan. 2010 – Aug. 2011 Dec. 2011 – Feb. 2016 Dollar Percent Dollar Percent Dollar Percent Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) -0.088** -0.074** -0.034** -0.062** -0.080** -0.084** -0.005 -0.006 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.821) (0.434) 0.831** 0.587** 0.410** 0.286** 0.737** 0.305** 0.958** 0.630** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) -0.015** -0.012** -0.006** -0.005** -0.010** -0.006** -0.019** -0.011** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) 0.004* -0.005** 0.007** -0.002 0.010** 0.005** 0.007** -0.003* (0.011) (0.000) (0.000) (0.222) (0.000) (0.009) (0.001) (0.033) 1,331,185 1,331,185 292,670 292,670 411,698 411,698 626,768 626,768 3,833 3,833 2,625 2,625 2,358 2,358 3,078 3,078 Full Sample Parameter Post-Addition Indicator [6] Equity Volatility[7] Log of Option Volume[8] Log of Underlying Volume[9] Number of Class/Days Number of Classes [4] [5] Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on effective spreads in the options market. The sample includes data for all options on common stock that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average effective spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Options with non-standard settlement types are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Effective spreads that are greater than $5 when the price is less than $100 and effective spreads that are greater than $10 otherwise are excluded from the average effective spread calculation. If the underlying stocks traded below $1 or above $1,000 on any day for which an average effective spread is calculated, the entire option class is removed from the sample. Date and option class fixed effects are used. Standard errors are estimated by clustering on option class and date. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] The model is estimated over the time period from December 1, 2006 to February 29, 2016. The sample includes 38 calendar months of data. [3] Pilot addition dates 1/26/07, 9/28/07, 3/28/08, and 11/2/09 are included in the December 2006 – December 2009 period. [4] Pilot addition dates 2/1/10, 5/3/10, 8/2/10, 1/4/11, and 7/6/11 are included in the January 2010 – August 2011 period. [5] Pilot addition dates 1/4/12, 7/3/12, 1/3/13, 7/3/13, 1/3/14, 7/3/14, 1/5/15, and 7/6/15 are included in the December 2011 – February 2016 period. [6] An indicator variable that equals one in the post-addition period and zero otherwise. [7] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [8] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [9] The natural log of the volume for the underlying stock. Table 14 Penny Pilot Regression Results[1] Impact on Quoted Spreads Option Classes on Common Stock [2] Dec. 2006 – Dec. 2009 [3] Jan. 2010 – Aug. 2011 Dec. 2011 – Feb. 2016 Dollar Percent Dollar Percent Dollar Percent Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) -0.161** -0.137** -0.053** -0.091** -0.122** -0.119** -0.037 -0.049** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.239) (0.000) 0.907** 0.705** 0.441** 0.331** 0.812** 0.360** 1.048** 0.769** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) -0.026** -0.021** -0.008** -0.008** -0.015** -0.012** -0.034** -0.023** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) 0.009** -0.005** 0.008** -0.002 0.014** 0.005* 0.014** -0.005* (0.000) (0.001) (0.000) (0.204) (0.000) (0.025) (0.000) (0.023) 1,331,123 1,331,123 292,668 292,668 411,691 411,691 626,715 626,715 3,832 3,832 2,625 2,625 2,358 2,358 3,077 3,077 Full Sample Parameter Post-Addition Indicator [6] Equity Volatility[7] Log of Option Volume[8] Log of Underlying Volume[9] Number of Class/Days Number of Classes [4] [5] Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on quoted spreads in the options market. The sample includes data for all options on common stock that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average quoted spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Options with non-standard settlement types are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Quoted spreads that are greater than $5 when the price is less than $100 and quoted spreads that are greater than $10 otherwise are excluded from the average quoted spread calculation. If the underlying stocks traded below $1 or above $1,000 on any day for which an average quoted spread is calculated, the entire option class is removed from the sample. Date and option class fixed effects are used. Standard errors are estimated by clustering on option class and date. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] The model is estimated over the time period from December 1, 2006 to February 29, 2016. The sample included 38 calendar months of data. [3] Pilot addition dates 1/26/07, 9/28/07, 3/28/08, and 11/2/09 are included in the December 2006 – December 2009 period. [4] Pilot addition dates 2/1/10, 5/3/10, 8/2/10, 1/4/11, and 7/6/11 are included in the January 2010 – August 2011 period. [5] Pilot addition dates 1/4/12, 7/3/12, 1/3/13, 7/3/13, 1/3/14, 7/3/14, 1/5/15, and 7/6/15 are included in the December 2011 – February 2016 period. [6] An indicator variable that equals one in the post-addition period and zero otherwise. [7] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [8] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [9] The natural log of the volume for the underlying stock. Table 15 Penny Pilot Regression Results[1] Impact on Effective Spreads Unconstrained Matching[2] Full Sample[3] Parameter Post-Switch Indicator [7] Equity Volatility[8] Log of Option Volume[9] Log of Underlying Volume[10] Number of Class/Days Number of Classes Dec. 2006 – Dec. 2009[4] Jan. 2010 – Aug. 2011[5] Dec. 2011 – Aug. 2015[6] Dollar Percent Dollar Percent Dollar Percent Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) -0.036** -0.058** -0.034** -0.059** -0.040** -0.060** -0.011* -0.032** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.036) (0.001) 0.360** -0.200 0.286** -0.194** 0.391** -0.251 0.362** 0.158 (0.000) (0.110) (0.000) (0.009) (0.000) (0.196) (0.002) (0.206) 0.002** -0.001 0.002** 0.000 0.002* -0.002 0.001 0.016** (0.004) (0.439) (0.008) (0.959) (0.022) (0.234) (0.653) (0.005) 0.008** 0.009 0.010** 0.009* 0.006** 0.010 0.018** -0.018 (0.000) (0.074) (0.000) (0.027) (0.001) (0.148) (0.001) (0.236) 21,025 21,025 7,368 7,368 12,369 12,369 1,288 1,288 494 494 170 170 292 292 32 32 Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on effective spreads in the options market. The sample includes data for options on common stock that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average effective spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Option classes on common stock are identified using share code 10 and 11 in the CRSP data. Options with non-standard settlement types are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Effective spreads that are greater than $5 when the price is less than $100 and effective spreads that are greater than $10 otherwise are excluded from the average effective spread calculation. If the underlying stocks traded below $1 or above $1,000 on any day for which an average effective spread is calculated, the entire option class is removed from the sample. Date and option event fixed effects are used. Standard errors are estimated by clustering on option class-event and date. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. [3] The model is estimated over the time period from December 1, 2006 to August 31, 2015. [3] Pilot addition dates 1/26/07, 9/28/07, 3/28/08, and 11/2/09 are included in the December 2006 – December 2009 period. [4] Pilot addition dates 2/1/10, 5/3/10, 8/2/10, 1/4/11, and 7/6/11 are included in the January 2010 – August 2011 period. [5] Pilot addition dates 1/4/12, 7/3/12, 1/3/13, 7/3/13, 1/3/14, 7/3/14, 1/5/15, and 7/6/15 are included in the December 2011 – August 2015 period. [7] An indicator variable that equals one in the post-switch period and zero otherwise. [8] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [9] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [10] The natural log of the volume for the underlying stock. Table 16 Penny Pilot Regression Results[1] Impact on Quoted Spreads Unconstrained Matching[2] [3] Dec. 2006 – Dec. 2009 [4] Jan. 2010 – Aug. 2011 Dec. 2011 – Feb. 2015 Dollar Percent Dollar Percent Dollar Percent Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) -0.052** -0.078** -0.048** -0.075** -0.056** -0.082** -0.036** -0.062** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) 0.393** -0.195 0.274** -0.228** 0.439** -0.247 0.405* 0.313* (0.000) (0.161) (0.002) (0.003) (0.000) (0.253) (0.011) (0.021) 0.000 -0.004* 0.001 -0.001 0.000 -0.004* -0.002 0.003 (0.698) (0.019) (0.256) (0.452) (0.795) (0.023) (0.759) (0.600) 0.011** 0.011* 0.014** 0.011** 0.008** 0.012 0.029** -0.009 (0.000) (0.032) (0.000) (0.009) (0.000) (0.105) (0.000) (0.321) 21,025 21,025 7,368 7,368 12,369 12,369 1,288 1,288 494 494 170 170 292 292 32 32 Full Sample Parameter Post-Switch Indicator [7] Equity Volatility[8] Log of Option Volume[9] Log of Underlying Volume[10] Number of Class/Days Number of Classes [5] [6] Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on quoted spreads in the options market. The sample includes data for options on common stock that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average quoted spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Option classes on common stock are identified using share code 10 and 11 in the CRSP data. Options with non-standard settlement types are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Quoted spreads that are greater than $5 when the price is less than $100 and quoted spreads that are greater than $10 otherwise are excluded from the average quoted spread calculation. If the underlying stocks traded below $1 or above $1,000 on any day for which an average quoted spread is calculated, the entire option class is removed from the sample. Date and option event fixed effects are used. Standard errors are estimated by clustering on option class-event and date. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. [3] The model is estimated over the time period from December 1, 2006 to August 31, 2015. [3] Pilot addition dates 1/26/07, 9/28/07, 3/28/08, and 11/2/09 are included in the December 2006 – December 2009 period. [4] Pilot addition dates 2/1/10, 5/3/10, 8/2/10, 1/4/11, and 7/6/11 are included in the January 2010 – August 2011 period. [5] Pilot addition dates 1/4/12, 7/3/12, 1/3/13, 7/3/13, 1/3/14, 7/3/14, 1/5/15, and 7/6/15 are included in the December 2011 – August 2015 period. [7] An indicator variable that equals one in the post-switch period and zero otherwise. [8] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [9] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [10] The natural log of the volume for the underlying stock. Table 17 Penny Pilot Regression Results[1] Impact on Effective Spreads Unconstrained Matching[2] Market Capitalization Percentile[3] th th 95 and Above Parameter Post-Switch Indicator[4] [5] Equity Volatility [6] Log of Option Volume Log of Underlying Volume[7] Number of Class/Days Number of Classes th th 75 – 94 th th 50 – 74 Below 50 Dollar Percent Dollar Percent Dollar Percent Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) -0.035** -0.060** -0.036** -0.047** -0.037** -0.076** -0.032** -0.087** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) 0.602** -0.083 0.407** -0.056 0.334** -0.536 0.286** -0.097 (0.000) (0.378) (0.000) (0.300) (0.000) (0.085) (0.000) (0.781) 0.002** 0.001 0.002* -0.001 0.001 0.000 0.001 -0.015 (0.009) (0.439) (0.013) (0.542) (0.799) (0.959) (0.568) (0.150) 0.009** 0.007** 0.010** 0.007* 0.007 0.034* 0.001 -0.005 (0.000) (0.004) (0.000) (0.010) (0.104) (0.027) (0.792) (0.664) 5,923 5,923 10,465 10,465 3,198 3,198 1,439 1,439 138 138 246 246 76 76 34 34 Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on effective spreads in the options market. The sample includes data for options on common stock that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average effective spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Options with non-standard settlement types are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Effective spreads that are greater than $5 when the price is less than $100 and effective spreads that are greater than $10 otherwise are excluded from the average effective spread calculation. If the underlying stocks traded below $1 or above $1,000 on any day for which an average effective spread is calculated, the entire option class is removed from the sample. Date and option event fixed effects are used. Standard errors are estimated by clustering on option class-event and date. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. [3] Matched pairs of switching and non-switching option classes are categorized into market capitalization percentiles using the underlying market capitalization of the switching option class at the end of the month prior to the addition date. Market capitalization percentiles are defined using the stocks listed on the NYSE. [4] An indicator variable that equals one in the post-switch period and zero otherwise. [5] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [6] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [7] The natural log of the volume for the underlying stock. Table 18 Penny Pilot Regression Results[1] Impact on Quoted Spreads Unconstrained Matching[2] Market Capitalization Percentile[3] th th 75 – 94th 95 and Above Parameter Post-Switch Indicator[4] Equity Volatility[5] Log of Option Volume[6] [7] Log of Underlying Volume Number of Class/Days Number of Classes 50th – 74th Below 50th Dollar Percent Dollar Percent Dollar Percent Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) -0.050** -0.078** -0.054** -0.066** -0.053** -0.101** -0.044** -0.112** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) 0.626** -0.116 0.414** -0.048 0.454** -0.457 0.338** -0.150 (0.000) (0.224) (0.000) (0.452) (0.000) (0.167) (0.000) (0.712) 0.001 0.000 0.001 -0.002 -0.001 -0.004 -0.001 -0.022* (0.222) (0.993) (0.642) (0.105) (0.656) (0.446) (0.713) (0.048) 0.012** 0.009** 0.014** 0.008** 0.008 0.035* 0.001 0.002 (0.000) (0.000) (0.000) (0.010) (0.098) (0.019) (0.811) (0.891) 5,923 5,923 10,465 10,465 3,198 3,198 1,439 1,439 138 138 246 246 76 76 34 34 Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on quoted spreads in the options market. The sample includes data for options on common stock that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average quoted spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Options with non-standard settlement types are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Quoted spreads that are greater than $5 when the price is less than $100 and quoted spreads that are greater than $10 otherwise are excluded from the average quoted spread calculation. If the underlying stocks traded below $1 or above $1,000 on any day for which an average quoted spread is calculated, the entire option class is removed from the sample. Date and option class-event fixed effects are used. Standard errors are estimated by clustering on option class-event and date. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. [3] Matched pairs of switching and non-switching option classes are categorized into market capitalization percentiles using the underlying market capitalization of the switching option class at the end of the month prior to the addition date. Market capitalization percentiles are defined using the stocks listed on the NYSE. [4] An indicator variable that equals one in the post-switch period and zero otherwise. [5] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [6] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [7] The natural log of the volume for the underlying stock. Table 19 Penny Pilot Regression Results[1] Impact on Effective Spreads Unconstrained Matching[2] Option Volume Percentile[3] th th 98 and Above Parameter Post-Switch Indicator[4] [5] Equity Volatility [6] Log of Option Volume Log of Underlying Volume[7] Number of Class/Days Number of Classes th th 95 – 97 th th 90 – 94 Below 90 Dollar Percent Dollar Percent Dollar Percent Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) -0.033** -0.045** -0.038** -0.061** -0.037** -0.055** -0.034** -0.070** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) 0.374** -0.054 0.277** -0.307 0.422** 0.051 0.368** -0.423 (0.000) (0.502) (0.000) (0.129) (0.000) (0.443) (0.000) (0.273) 0.003* 0.001 0.003** 0.001 0.003* 0.002 -0.001 -0.005 (0.039) (0.511) (0.002) (0.575) (0.026) (0.241) (0.599) (0.106) 0.012** 0.005 0.006* 0.002 0.007** 0.003 0.006 0.023 (0.000) (0.236) (0.047) (0.620) (0.000) (0.470) (0.093) (0.120) 4,208 4,208 6,609 6,609 6,156 6,156 4,052 4,052 98 98 154 154 146 146 96 96 Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on effective spreads in the options market. The sample includes data for options on common stock that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average effective spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Options with non-standard settlement types are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Effective spreads that are greater than $5 when the price is less than $100 and effective spreads that are greater than $10 otherwise are excluded from the average effective spread calculation. If the underlying stocks traded below $1 or above $1,000 on any day for which an average effective spread is calculated, the entire option class is removed from the sample. Date and option class-event fixed effects are used. Standard errors are estimated by clustering on option class-event and date. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. [3] Matched pairs of switching and non-switching option classes are categorized into option class volume percentiles using the option class volume of the switching option class during the month prior to the addition date. Option class percentiles are defined using the universe of option classes on common stock in the LiveVol data. [4] An indicator variable that equals one in the post-switch period and zero otherwise. [5] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [6] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [7] The natural log of the volume for the underlying stock. Table 20 Penny Pilot Regression Results[1] Impact on Quoted Spreads Unconstrained Matching[2] Option Volume Percentile[3] th th 95 – 97th 98 and Above Parameter Post-Switch Indicator[4] Equity Volatility[5] Log of Option Volume[6] [7] Log of Underlying Volume Number of Class/Days Number of Classes 90th – 94th Below 90th Dollar Percent Dollar Percent Dollar Percent Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) -0.048** -0.059** -0.056** -0.084** -0.055** -0.075** -0.045** -0.092** (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) 0.415** -0.025 0.266** -0.365 0.487** 0.090 0.421** -0.368 (0.000) (0.762) (0.001) (0.123) (0.000) (0.281) (0.001) (0.362) 0.002 0.000 0.002 0.000 0.001 -0.001 -0.003 -0.008** (0.156) (0.928) (0.083) (0.920) (0.559) (0.722) (0.115) (0.009) 0.015** 0.006 0.010** 0.003 0.010** 0.006 0.008* 0.026 (0.000) (0.148) (0.009) (0.529) (0.000) (0.186) (0.049) (0.094) 4,208 4,208 6,609 6,609 6,156 6,156 4,052 4,052 98 98 154 154 146 146 96 96 Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on quoted spreads in the options market. The sample includes data for options on common stock that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average quoted spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Options with non-standard settlement types are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Quoted spreads that are greater than $5 when the price is less than $100 and quoted spreads that are greater than $10 otherwise are excluded from the average quoted spread calculation. If the underlying stocks traded below $1 or above $1,000 on any day for which an average quoted spread is calculated, the entire option class is removed from the sample. Date and option class-event fixed effects are used. Standard errors are estimated by clustering on option class-event and date. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. [3] Matched pairs of switching and non-switching option classes are categorized into option class volume percentiles using the option class volume of the switching option class during the month prior to the addition date. Option class percentiles are defined using the universe of option classes on common stock in the LiveVol data. [4] An indicator variable that equals one in the post-switch period and zero otherwise. [5] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [6] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [7] The natural log of the volume for the underlying stock. Table 21 Penny Pilot Regression Results[1] Option Classes on ETFs Full Sample[2] Parameter Post-Switch Indicator[4] Equity Volatility[5] Log of Option Volume[6] Log of Underlying Volume[7] Number of Class/Days Number of Classes Effective Spread Dollar Percent Unconstrained Matching[3] Quoted Spread Dollar Percent Effective Spread Dollar Percent Quoted Spread Dollar Percent (1) (2) (3) (4) (5) (6) (7) (8) 0.008 -0.032** -0.045* -0.093** -0.049** -0.050** -0.066** -0.072** (0.664) (0.000) (0.034) (0.000) (0.000) (0.000) (0.000) (0.000) 2.293** 0.149 2.331** -0.055 1.067** 0.190 1.304** 0.097 (0.000) (0.144) (0.000) (0.682) (0.000) (0.120) (0.000) (0.501) -0.023** -0.014** -0.031** -0.021** 0.001 0.001 0.001 -0.001 (0.000) (0.000) (0.000) (0.000) (0.399) (0.782) (0.729) (0.659) -0.029** -0.010** -0.040** -0.011** 0.003 -0.008** 0.001 -0.011** (0.000) (0.000) (0.000) (0.000) (0.602) (0.001) (0.860) (0.000) 194,694 194,694 194,659 194,659 4,537 4,537 4,537 4,537 693 693 693 693 106 106 106 106 Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] This table reports results from a panel regression estimating the effects of switching to trading in pennies on quoted and effective spreads in the options market. The sample includes data for all options on ETFs that traded in the calendar month before and calendar month after the Penny Pilot addition dates. The dependent variable is the average quoted or average effective spread. The average spread is calculated by (1) calculating the volume weighted spread for an option series-day and then (2) equally weighting across option series to calculate the average spread for an option class-day. Canceled trades and trades that were executed during a locked or crossed market are excluded. Only trades with a condition code in 0, 18, 95, and 106 are included. Condition codes 0, 18, 95, and 106 correspond to regular trades and intermarket sweep orders. Quoted spreads that are greater than $5 when the price is less than $100 and quoted spreads that are greater than $10 otherwise are excluded from the average quoted spread calculation. The same restrictions are used to calculate average effective spreads. If the underlying ETF traded below $1 or above $1,000 on any day for which an average quoted spread or effective spread is calculated, the entire option class is removed from the sample. The "Permno" in CRSP is used to identify option classes over time. P-values are reported in parentheses below the coefficient estimates. Coefficient estimates that are statistically different from zero at the 5% significance level are marked with one asterisk and those that are statistically different from zero at the 1% significance level are marked with two asterisks. [2] All option classes on common stock for which LiveVol has data are included. Date and option class fixed effects are used. Standard errors are estimated by clustering on option class and date. [3] Each switching option class is matched with a non-switching option class based on underlying market capitalization and option volume. Date and option class-event fixed effects are used. Standard errors are estimated by clustering on option class-event and date. [4] An indicator variable that equals one in the post-switch period and zero otherwise. Note that under unconstrained matching, a switching option class may match with an option class that is already in the Pilot, in which case the option class that is already in the Pilot, acting as the control option class, has a value of zero in the pre-switch and post-switch period. [5] The underlying stock volatility as measured by the high price minus the low price divided by the closing price. [6] The natural log of the option class volume. The option class volume excludes canceled trades and only includes trades with a condition code in 0, 18, 95, and 106. [7] The natural log of the volume for the underlying stock. Table 22 Liquidity Metrics for In-Pilot Option Classes and Control Samples February 2016 Daily Volume of Option Class (Contracts) Number of Number of Clusters for Matching with Option Classes Replacement[1] Market Cap of Underlying Stock (Millions) Option Volume Quartile for In-Pilot Option Classes Percentile Range in Universe of Option Classes First Quartile 41.4% - 88.3% 56 53 1,044 1,053 825 10,963 10,434 8,789 Second Quartile 88.4% - 95.0% 57 41 3,906 3,734 2,122 27,821 21,220 14,311 Third Quartile 95.0% - 97.7% 57 25 10,005 6,208 2,841 50,927 37,125 19,441 Fourth Quartile 97.7% - 100.0% 56 23 53,504 10,977 4,990 107,613 71,809 24,334 In-Pilot With Without Replacement[2] Replacement[3] In-Pilot With Without Replacement[2] Replacement[3] Sources: LiveVol; CRSP; OptionMetrics; ISE Penny Pilot Addition Dates. [1] The number of unique control option classes in matching with replacement. In matching with replacement, an in-Pilot option class can match with any number of switching option classes. [2] Each in-Pilot option class is matched to an out-of-Pilot option classes based on underlying market capitalization, underlying price, and option volume. Matching is completed with replacement, i.e. an out-of-Pilot option class can match with any number of in-Pilot option classes. [3] Each in-Pilot option class is matched to an out-of-Pilot option classes based on underlying market capitalization, underlying price, and option volume. Matching is completed without re [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A6aebd220700f155a. Public record. Not legal advice.