Competition, Market Structure and Bid-Ask Spreads in Stock Option Markets

Posted: 13 Oct 2001

Abstract

This paper examines the effects of competition and market structure on the bid-ask spreads for stock options traded on the Chicago Board Options Exchange (CBOE) between 1986 and 1997. Options listed on multiple exchanges are found to have narrower spreads than those listed on a single exchange, but the difference is smaller for effective spreads than quoted spreads, and the effect diminishes as option volume increases. Option spreads become wider when a competing exchange delists the option. Options traded under a "Designated Primary MarketMaker" (DPM) are found to have narrower quoted spreads than those traded in a traditional open outcry crowd. Effective spreads are found to be slightly narrower under the DPM than in the crowd, but only since 1992, and only on low-volume options.

Suggested Citation

Mayhew, Stewart, Competition, Market Structure and Bid-Ask Spreads in Stock Option Markets. Journal of Finance, Vol. 57, pp. 931-958, 2002. Available at SSRN: https://ssrn.com/abstract=287100

Stewart Mayhew (Contact Author)

Cornerstone Research ( email )

1919 Pennsylvania Avenue NW
Suite 600
Washington, DC 20006-3420
United States

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