Intraday Trading and Bid–Ask Spread Characteristics for SPX and SPY Options

Abstract

With intraday financial data increasingly available, we are now able to explore the microstructure of trading in detail. One feature that is typically seen in intraday stock returns is a clear U-shaped pattern of trading activity: a lot of action after the opening and at the close, with a lower amount around the midday lunch hour. Such patterns are found for various trading measures, including volume, bid–ask spreads, and volatility. Options markets may or may not exhibit a similar pattern as their underlying stocks; evidence is sparse and shows differing results for different markets. Mishra and Daigler find the intraday trading patterns for two closely related index options are quite different. SPX options are written on the S&P 500 index and are traded at the CBOE both electronically and by open outcry. SPY options are written on the SPDR exchange traded fund, which is designed to replicate the daily returns on the S&P 500. The SPDR ETF is traded electronically on many trading platforms. SPX options are traded in large size by financial firms and individuals, whereas SPY options seem to appeal more to the retail trader. As with stocks, SPY options show the U-shaped pattern, whereas it is not found with the SPX. An interesting comparison between the calm environment of 2007 and the market turmoil in 2008 reveals that while trading volume for SPY contracts shot up in the crisis, volume for SPX contracts did not.