Optimal Contract Design: For Whom?
Journal of Futures Markets 23, p.719-750, 2003

Nicolas P.B. Bollen, Tom Smith, and Robert E. Whaley

ABSTRACT
In designing a derivative contract, an exchange carefully considers how its attributes affect the expected profits of its members. On November 3, 1997, the Chicago Mercantile Exchange doubled the tick size of its S&P 500 futures contract and halved the denomination, providing a rare opportunity to examine empirically the search for an optimal contract design. This article measures changes in the trading environment that occurred in the days surrounding the contract redesign. We find a discernible change in the incidence of price clustering, an increase in the bid/ask spread, a reduction in trading volume, and no meaningful change in dollar trade size. These results suggest that the contract redesign did not increase accessibility but did increase market maker revenue. Despite the increase, however, the bid/ask spread of the S&P 500 futures contract remains low relative to the costs of market making and the spreads in markets for competing instruments.