Review of Quantitative Finance and Accounting, 21: 323–348, 2003
2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Split of the S&P 500 Futures Contract:
Effects on Liquidity and Market Dynamics
AHMET K. KARAGOZOGLU
Department of Finance, Hofstra University, Hempstead, NY 11549, USA Tel.: (516) 463-5701, Fax: (516) 463-4834
TERRENCE F. MARTELL
Department of Economics and Finance, Zicklin School of Business, Baruch College, CUNY, One Baruch Way,
Box J-0810 New York, NY 10010, USA Tel.: (646) 312-2075, Fax: (646) 312-2071
GEORGE H. K. WANG
Ofﬁce of Chief Economist, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington,
DC 20581, USA Tel.: (202) 418-5288, Fax: (202) 418-5527
Abstract. The Chicago Mercantile Exchange reduced the size of its S&P 500 futures contract when it reduced
the multiplier from 500 to 250 and increased the minimum tick from 0.05 to 0.10 on November 3, 1997. This is a
rare major change in a very successful contract’s speciﬁcations. We analyze effects of this change on liquidity and
market dynamics in both a univariate and a multivariate context. The main contribution of this study is the use of
multiple intervention analysis with various dynamic response functions to examine the effects of the split while
taking into account several other major market events surrounding it. A multivariate analysis is also used to test
the impact of the split using a structural model of liquidity and market dynamics. Empirical ﬁndings offer limited
support for the hypotheses that smaller contract size resulted in smoother trading, and that more public customers
trade the S&P 500 futures contract following its split. We observe a reduction in the average transaction size as
well as a temporary narrowing of the bid-ask spreads, but no signiﬁcant change in volatility that can be attributed
to the split. We do not ﬁnd any signiﬁcant and lasting impact on other liquidity and market variables.
Keywords: S&P 500 index, futures contract, contract size, tick size, bid-ask spreads, liquidity
JEL Classiﬁcation: G10
U.S. futures exchanges have many times altered the speciﬁcation of a failing contract in an
attempt to revitalize it. The split of the S&P 500 futures contract at the Chicago Mercantile
Exchange is a rare change of a very successful contract’s speciﬁcations.
The change provides an excellent opportunity to analyze effects on liquidity and market
dynamics, major concerns of the exchange and market participants prior to the split. This
study builds on research by Karagozoglu and Martell (1999), and complements work by
Huang and Stoll (1998) who examined the need to split the S&P 500 futures contract.