Description
Abstract: We document the outcome of an options decimalization pilot on Canada's derivatives exchange. Decimalization improves measures of liquidity and price efficiency. The impact differs by the moneyness of an option and is greatest for out-of-themoney options. In contrast with equity studies, decimalization improved depth near the best prices and improved liquidity for larger trades. We conclude with advice on decimalizing options: Options that benefit most have an underlying volatility of less than 40, an underlying equity bid-ask spread of less than 50 basis points, at least one trade a day, and a distribution of depth skewed toward marketable prices.