A Novel Approach to Implement Price Banding with Dynamic Implied Volatility Surface

In order to overcome the problem of Fat finger when the liquidity of options could not obtain a significant variety, a new implement price banding method was proposed. The proposed method uses the dynamic implied volatility surface to improve the price banding efficiency for Fat finger problem.First, we choose the "two-step" method to build a dynamic model. We fit an implied volatility surface to each cross-section of options by two factors: moneyness and time to expiration, then we model and forecast the estimated volatility function coefficients by VAR. Then, we take the price calculated by the model as the banding reference price, and establish the checking range for orders. The experiment result shows that the proposed method outperforms the other similar researches in prediction accuracy aspect, especially for soybean meal options with low liquidity. Moreover, it could remarkably keep the market far away from freezing, which powerfully protects the derivatives market's administration.