Are SPDR Options Good for the Underlying Stocks?

Theories are inconclusive about the various impacts of the introduction of basket securities on the underlying stocks. We explore those effects for the first time around the launch of options on exchange traded funds (ETF), employing the listing of the options on the S&P 500 Depository Receipts (SPDRs) in January 2005. With known factors controlled respectively, we find that the introduction of the SPDRs options leads to lower trading volume, higher bid-ask spread, higher systematic and total risks, and lower prices for the underlying stocks, consistent with the theory that the advent of basket derivatives alters the mix of various types of portfolio traders in the related markets when they are fully integrated