Large Option Trades, Market Makers and Limit Orders

REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 3

Posted: 20 Dec 1998

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Abstract

This paper focuses on the difference between market makers and limit orders in their role as suppliers of liquidity. For both sources of liquidity I analyze the price behavior of stocks and options around large options trades and I estimate the premium paid by the initiator of the large trade. My findings suggest that limit orders for options are 'picked off' after adverse changes in the underlying stock price. Furthermore, I find that for these transactions there is a permanent change in quotations in the direction of the transaction. After transactions where market makers supply liquidity, quotes tend to return to their pre-trade level.

JEL Classification: G13, G14

Suggested Citation

Berkman, Henk, Large Option Trades, Market Makers and Limit Orders. REVIEW OF FINANCIAL STUDIES, Vol. 9 No. 3. Available at SSRN: https://ssrn.com/abstract=7422

Henk Berkman (Contact Author)

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

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