Trade size and information-motivated trading in the options and stock markets

This study investigates the extent of information-motivated trading conditional on trade size in the options and stock markets. We find evidence that the options market is the primary venue for information trading only for small investors, whereas large investors do not necessarily trade options rather than stocks when they are informed. With different trading mechanisms in the stock and options markets, this finding implies that investors, when facing different impediments to information-related trading, select different vehicles to exploit their information. We also show that the adverse selection component of the bid-ask spread decreases with option delta, implying that options with greater financial leverage attract more informed investors. Overall, our results reinforce the notion that the options market is a venue for information-motivated trading.