The Behavior of Bid-Ask Spreads and Volume in Options Markets During the Competition for Listings in 1999
38 Pages Posted: 27 Dec 2002
Date Written: October 30, 2002
In August 1999, U.S. exchanges began to compete directly for order flow in many options that had been exclusively listed on another exchange, shifting 37 percent of option volume to multiple-listing status by the end of September. Effective and quoted bid-ask spreads decrease significantly after multiple listing with spreads generally maintaining their initial lower levels one year later. These results hold for both time series and pooled regressions and are robust. We reject that economies of scale in market making cause the decrease in spreads and support the view that inter-exchange competition reduces option transaction costs.
Keywords: Multiple Listing, Option Bid-Ask Spreads, Fragmented Markets
JEL Classification: G10, G14
Suggested Citation: Suggested Citation