Abstract:
The S&P 500 Index futures contract is traded on the Chicago Mercantile Exchange that is
regulated by the Commodity Futures Trading Commission. The S&P 500 Index options
contract is traded on the Chicago Board of Options Exchange that is regulated by the
Securities and Exchange Commission. The differing regulatory structures have led to the
S&P 500 Index futures and options contracts being subject to differing customer
margining (collateral) requirements. Generally, S&P 500 Index options customer
margin requirements are higher than their futures counterpart for a comparably leveraged
position. This dissertation examines whether higher relative margin costs lead to trader
substitution between markets such that margin costs help determine relative market share.
The empirical result I find is that margin costs do not appear to affect market share
between options and futures markets. This result may not necessarily be a rejection of
economic theory that suggests traders will substitute between like assets based on
differences in these assets’ costs, but may result from large illiquidity in options markets
as characterized by the empirical finding of relatively large bid ask spreads in options
markets for similarly leveraged positions. The finding of relatively large bid ask spread
costs in the S&P 500 options market is consistent with the academic literature finding
that price discovery occurs primarily in the futures market ( Fleming, Ostdiek and
Whaley (1996)).
