High-frequency Analysis of the Impact of Retail Trading on Options Markets

Francisco Ruela, Finance PhD student

The options market has been historically dominated by professional and “sophisticated” traders. However, in recent years, there has been a significant increase in retail trading activity within this market. Notable shifts occurred in 2018 and 2019, marked by the emergence of ”zero-fee” brokers, the influence of social phenomena such as meme-stocks, and a substantial increase in free time resulting from the pandemic. According to Bryzgalova, Pavlova, and Sikorskaya 2022, more than 50% of non-market maker volume in the options market now generated by retail traders. This study aims to explore the implications of this shift in market composition on both price informativeness and liquidity within the options market. Using trade level data from the CBOE, I aim to infer the relative preferences of retail traders for various maturities and products to understand their impact on prices and provide further insights into these questions.