Does Adverse Selection Affect Bid-Ask Spreads for Options‘

Journal of Futures Markets, Vol. 28, No. 5, pp. 417-437, May 2008

32 Pages Posted: 4 Feb 2008 Last revised: 10 Mar 2014

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance

Frank Fehle

BlueCrest Capital

David G. Shrider

Miami University of Ohio - Richard T. Farmer School of Business Administration

Date Written: July 24, 2007

Abstract

This paper examines two different option markets to test whether differences in the level of adverse selection faced by market makers affects the size of bid-ask spreads. The data are from bank-issued options that trade on EuWax, where market makers face little adverse selection and traditional options that trade on EuRex. The results support the hypothesis that the adverse selection component of the bid-ask spread is important as options on EuWax have lower bid-ask spreads than comparable options on EuRex. The results show that the adverse selection component represents at least half of the overall bid-ask spread on the traditional EuRex.

Keywords: Options, Market Design, Microstructure, Bid-Ask Spreads

JEL Classification: G10, G13

Suggested Citation

Bartram, Söhnke M. and Fehle, Frank Rudolf and Shrider, David G., Does Adverse Selection Affect Bid-Ask Spreads for Options‘ (July 24, 2007). Journal of Futures Markets, Vol. 28, No. 5, pp. 417-437, May 2008. Available at SSRN: https://ssrn.com/abstract=1089222

Söhnke M. Bartram

Warwick Business School - Department of Finance ( email )

Coventry, CV4 7AL
United Kingdom
+44 (24) 7657 4168 (Phone)
+1 425 952 1070 (Fax)

HOME PAGE: http://go.warwick.ac.uk/sbartram/

Frank Rudolf Fehle

BlueCrest Capital ( email )

40 Grosvenor Place
London, SW1X 7AW
United Kingdom

David G. Shrider (Contact Author)

Miami University of Ohio - Richard T. Farmer School of Business Administration ( email )

Oxford, OH 45056
United States
513-529-8792 (Phone)
513-529-8598 (Fax)

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