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The Allocation of Informed Trading Across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements





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    • Mayhew is from Haas School of Business, University of California-Berkeley. Sarin is from the Leavey School of Business, Santa Clara University. Shastri is from the Katz Graduate School of Business, University of Pittsburgh. This article was formerly titled “The Impact of Changes in Margin Requirements on Market Microstructure: An Intermarket Comparison.” We would like to thank the anonymous referee, Gurdip Bakshi, Don Chance, Y. Peter Chung, David Denis, Diane Denis, Tom George, Tarun Mukherjee, Mark Rubinstein, Matthew Spiegel, René Stulz (the editor), Avanidhar Subrahmanyam, and Oscar Varela for their comments and suggestions. Earlier versions of this article were presented at the University of New Orleans, the 1994 Cornell/Queens Derivatives Conference, the 1994 European Finance Association Conference, the 1994 Financial Management Association Conference, and the 1995 AMEX Options Colloquium. Sarin acknowledges financial support from the Dean Witter Foundation.


We examine the impact of changes in equity-option margin requirements on the liquidity of options and underlying stock markets. We find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, option spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks, but option spreads increased. Overall, our results indicate that uninformed traders are more sensitive to the margin dimension of trading costs.