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The Role of Retail and Institutional Traders in Options Markets

Elvis Jarnecic, Kevin Liu and George Issa
The Journal of Derivatives Winter 2015, 23 (2) 62-75; DOI: https://doi.org/10.3905/jod.2015.23.2.062
Elvis Jarnecic
is a senior lecturer of finance at the University of Sydney Business School in Sydney, Australia.
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  • For correspondence: elvis.jarnecic@sydney.edu.au
Kevin Liu
is a lecturer at the School of Risk and Actuarial Studies at the University of New South Wales Business School in Kensington, Australia.
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  • For correspondence: kevin.liu@unsw.edu.au
George Issa
is a PhD candidate at the University of Sydney Business School in Sydney, Australia.
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  • For correspondence: giss5076@uni.sydney.edu.au
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Abstract

This article examines the role of retail and institutional traders in an options market. Using unique data from the Australian Securities Exchange (ASX), trading profits are decomposed into a liquidity part and a position-taking part. Despite the presence of exogenous market makers, both institutional and retail traders derive average gains from supplying liquidity, suggesting that public traders are reluctant to pay for the larger cost of immediacy offered by market makers. Both trader groups incur average losses from price movements unfavorable to their inventory position, indicating that market makers are slightly better at predicting market movements. Overall, the results suggest that retail and institutional traders have similar economic roles.

TOPICS: Options, developed

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  • © 2015 Pageant Media Ltd
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The Journal of Derivatives: 23 (2)
The Journal of Derivatives
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Winter 2015
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The Role of Retail and Institutional Traders in Options Markets
Elvis Jarnecic, Kevin Liu, George Issa
The Journal of Derivatives Nov 2015, 23 (2) 62-75; DOI: 10.3905/jod.2015.23.2.062

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The Role of Retail and Institutional Traders in Options Markets
Elvis Jarnecic, Kevin Liu, George Issa
The Journal of Derivatives Nov 2015, 23 (2) 62-75; DOI: 10.3905/jod.2015.23.2.062
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