The Impacts of Multiplier Cut Information on Market Liquidity: Based on the KOSPI200 Futures

Abstract

KRX simultaneously cut the contract size of the KOSPI200 futures and options in halves on March 27, 2017. This is the first change which can influence the trading volume in the Korea futures market. We examine the effects of this change on liquidity using the intervention analysis with dynamic response functions. The results of this study are summarized as follows. Total trading volume has a significant increase indicating the abrupt and permanent response subsequent to the multiplier split. Such increase is attributed to the increase in the order of foreign, individual, and institutional investors. In the proportion, individual and institutional investors have a significantly initial increase without lasting effect whereas no significant change in foreign investors is observed. Moreover, individual investors are likely to enter the futures market more than institutional investors. The multiplier cut is not effective to attract voluntary participation from new or existing traders with lesser capital. As a result, the intention of financial authorities could not be achieved to revive a stagnant market. Beyond our purpose, we do not verify the effect of the multiplier change on the KOSPI200 options.