The Behavior of Bid-Ask Spreads and Volume in Options Markets During the Competition for Listings in 1999

38 Pages Posted: 27 Dec 2002

See all articles by Patrick de Fontnouvelle

Patrick de Fontnouvelle

Federal Reserve Bank of Boston - Supervision and Regulation

Raymond P.H. Fishe

University of Richmond - E. Claiborne Robins School of Business

Jeffrey H. Harris

American University - Department of Finance and Real Estate

Date Written: October 30, 2002

Abstract

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

de Fontnouvelle, Patrick and Fishe, Raymond P.H. and Harris, Jeffrey H., The Behavior of Bid-Ask Spreads and Volume in Options Markets During the Competition for Listings in 1999 (October 30, 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=363600 or http://dx.doi.org/10.2139/ssrn.363600

Patrick De Fontnouvelle

Federal Reserve Bank of Boston - Supervision and Regulation ( email )

600 Atlantic Avenue
P.O. Box 2076
Boston, MA 02210
United States
617-973-3659 (Phone)
617-973-3219 (Fax)

Raymond P.H. Fishe (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Road
Richmond, VA 23173
United States
804-289-8549 (Phone)

Jeffrey H. Harris

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

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