Publications:
Another Day, Another Collar: An Evaluation of the Effects
of NYSE Rule 80A on Trading Costs and Intermarket Arbitrage
by James Overdahl and Henry McMillan
OCC Working Paper 97-8, MAY 1997.
Abstract
Absrtact: In 1990, the NYSE amended its Rule 80A to restrict
stock index arbitrage on days of large price movements. We
design empirical tests to evaluate the impact of Rule 80A on
trading costs and intermarket arbitrage. We find that Rule 80A
significantly curtails -- or "collars" -- index arbitrage activity.
Despite the significant curtailment of index arbitrage activity,
the cash and futures markets remain linked. Pricing
discrepancies between the markets are simply eliminated less
quickly. Our results are consistent with the hypothesis that
information is conveyed from one market to the other by means
other than formal arbitrage. We also find that trading costs in
the stock market, as measured by the average bid-ask spread for
S&P 500 stocks, do not change following the triggering of Rule
80A, in spite of the binding constraint on index arbitrage
volume. Overall, Rule 80A appears to have had little impact on
trading costs and intermarket arbitrage despite significant
curtailment of index arbitrage volume.
Disclaimer
As with all OCC Working Papers, the opinions expressed in this paper are those of the author alone, and do not necessarily reflect the views of the Office of the Comptroller of the Currency or the Department of the Treasury.
Any whole or partial reproduction of material in this paper should include the following citation:
Overdahl and McMillan, "Another Day, Another Collar: An Evaluation of the Effects
of NYSE Rule 80A on Trading Costs and Intermarket Arbitrage," Office of the Comptroller of the Currency, E&PA Working Paper 97-8, May 1997.
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