Competition Without Fungibility: Evidence from Alternative Market Structures for Derivatives

26 Pages Posted: 23 Feb 2006 Last revised: 11 Mar 2014

See all articles by Söhnke M. Bartram

Söhnke M. Bartram

Warwick Business School - Department of Finance

Frank Fehle

BlueCrest Capital

Date Written: August 19, 2010

Abstract

In this paper, we compare option contracts from a traditional derivatives exchange to bank-issued options, also referred to as covered warrants. While bank-issued option markets and traditional derivatives exchanges exhibit significant structural differences such as the absence of a central counterparty for bank-issued options, they frequently exist side-by-side, and the empirical evidence shows that there is significant overlap in their product offerings although options are not fungible between the two markets. The empirical analysis indicates that bid-ask spreads in either market are lowered by 1-2% due to competition from the other market, providing evidence that the benefits of competing market structures are available in the absence of fungibility.

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

JEL Classification: G10, G13

Suggested Citation

Bartram, Söhnke M. and Fehle, Frank Rudolf, Competition Without Fungibility: Evidence from Alternative Market Structures for Derivatives (August 19, 2010). Journal of Banking and Finance, Vol. 31, No. 3, pp. 659-677, March 2007. Available at SSRN: https://ssrn.com/abstract=883641

Söhnke M. Bartram (Contact Author)

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

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