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The Behavior of Bid‐Ask Spreads and Volume in Options Markets during the Competition for Listings in 1999
Author(s) -
De Fontnouvelle Patrick,
Fishe Raymond P. H.,
Harris Jeffrey H.
Publication year - 2003
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1046/j.1540-6261.2003.00611.x
Subject(s) - bid price , competition (biology) , listing (finance) , order (exchange) , bid–ask spread , transaction cost , ask price , economics , database transaction , market maker , monetary economics , business , financial economics , microeconomics , market liquidity , finance , computer science , database , ecology , biology , paleontology , horse , stock market
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% of option volume to multiple‐listing status by the end of September. Effective and quoted bid–ask spreads decrease significantly after multiple listings with spreads generally maintaining their initial lower levels 1 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 interexchange competition reduces option transaction costs.