How do option contract sizes affect investor composition and market quality?

By analyzing highly informative account-level trade data, we study how an increase in the option contract multiplier affects investor composition in index options and futures markets. The increase in contract size reduces overall options trading, with heterogeneous effects across investor types: retail investors and high-frequency traders participate less, while (non-HFT) financial investment firms increase their relative activity. In the futures market, which is not directly affected by the regulation, high-frequency traders increase their share of volume, whereas investment firms reduce theirs. Intraday volatility and quoted spreads fall in the options market, while neither change significantly in the futures market. Enhanced market quality benefits institutional investors but makes the market less attractive for high-frequency traders. These shifts suggest that the two derivatives markets function as substitutes for certain investor groups.