Euronext confirms 1 cent tick size AEX

Told you so, my sources are always right. Euronext confirms the introduction of the 1 cent tick size increment in the AEX index options. Every option below the threshold of 1.50 can be traded with 1 cent tick size. This will mostly be relevant for the options with short maturities, mainly the weekly and daily options.

Kick off will be October 4 2013.

Lower tick size increments, will have more quote updates as consequence. That’s interesting, as the old exchange has seen great difficulty keeping systems running smoothly in the index options. Lags in the price feed have been a pain for several market makers (link).

Strategies

The root of the problem seems to be the strategies. Spreads, strangles and straddles are checked against implied prices of the single legs in the market. This way you can never pay more / receive less in a strategy than trading the single legs.

This functionality must have been eating capacity.  It will be switched off on September 27th. Not necessarily a good thing. For example, you will be able to buy a strangle for 20 cent, with both legs on the offer at 5 cent (hence, implied offer is 10 cent). Retail investors will miss protection, as well as market makers with fat fingers.

Second measure to solve the capacity puzzle is to give market makers more messages per second to update their prices.

Source (pdf)