Asian Review of Financial Research Vol.35 No.2 pp.147-189 https://www.doi.org/10.37197/ARFR.2022.35.2.5
The Impact of Multiplier Reduction on the Trading Performance in KOSPI200 Option Market
Key Words : Options,Trading Performance,Liquidity,Individual Investor,Multiplier
This study empirically analyzed the impact of the reduction in the multiplier in the derivative market conducted in 2017 on the trading behavior of investors in the KOSPI 200 option market. The KOSPI 200 option market, which was opened in 1997, has been the world's No. 1 in terms of trading volume since the 2000s, but it has been argued that the market size is too large compared to the GDP level or the market capitalization of the spot market. Accordingly, the financial authorities abolished the KOSPI 200 option purchase-only account from 2011, and from March 2012, the transaction multiplier of options was drastically increased from 100,000 won to 500,000 won. This was intended to reduce speculative transactions in the option market by increasing the transaction multiplier to limit individual investors' barriers to entering the market, as individual investors participating in the market without sufficient prior knowledge of derivatives. The regulation on entry into the option market shifted to an easing policy to reduce the transaction multiplier of KOSPI 200 derivatives to 250,000 won, which is 1/2 of the previous one, after March 2017. The measure to change the transaction multiplier applied to the KOSPI 200 option in 2012 and 2017 is an important policy example that brought structural changes to the quality level of the market. The effectiveness of the policy due to such a change in the transaction multiplier should be carefully evaluated afterwards in terms of not only the level of liquidity related to the size of the derivative market, but also the behavior of investors participating in the derivative market. This study analyzes the impact of the reduction in the multiplier of KOSPI 200 derivatives, which took effect in March 2017, on the trading behavior of each investor, not the 2012 KOSPI 200 option multiplier event, which previous studies focused on. This is an example of examining the effect of the derivatives activation policy by comparing the effect of the increase in the option multiplier in 2012 and the effect of the reduction in the multiplier in contrast. The main empirical findings can be summarized as follows: During the period after the reduction of multiplier, foreigners' leadership in trading was strengthened, continuing to outperform the institutions and individuals. The institution's trading performance was superior to that of individuals or foreigners in the period before the reduction of multiplier, but the institution suffered significant losses in the period after the reduction. In addition, the inferior performance of individuals with accumulated losses from the period before the reduction was further worsened during the reduction period. Foreigners who experienced low profits in the period before the multiplier reduction, monopolized profits during the period after the multiplier reduction, and showed superior performance against losses of individuals and institutions. These results suggest that individual investors have increased access to the option market as a result of the multiplier reduction, but still persisted poor performance. Finally, the policy of multiplier reduction can be interpreted to have a differential effect on the trading performance due to the option strategy implemented by institutions and foreigners. The results of this empirical analysis suggest that individual investors, who have increased access to transactions due to the easing of entry barriers due to the multiplier reduction, are still inferior in terms of trading performance. This is a result of reaffirming that the multiplier change policy consistently with previous studies that reported that individual investors' losses continued despite the strengthening of entry barriers after the 2012 multiplier increase had no significant effect on changes in individual investors' trading behavior.