How New Entry in Options Markets Affected Market Making and Trading Costs

Posted: 29 Apr 2005

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

Abstract

A significant competition for order flow in options markets occurred in August 1999. Before the competition, the majority of option volume arose from exclusive listings. By the end of September 1999, entry by existing option exchanges had shifted the majority of option volume to multiple-listing status. Both effective and quoted bid-ask spreads decrease significantly after entry with spreads remaining at lower levels 1 year later. A pooled regression analysis shows that new inter-exchange competition reduces option trading costs. This analysis also rejects the view that economies of scale in market making or lower hedging costs contribute significantly to the decrease in spreads.

Keywords: Bid-ask spreads, option markets, multiple

JEL Classification: G00

Suggested Citation

de Fontnouvelle, Patrick and Fishe, Raymond P.H. and Harris, Jeffrey H., How New Entry in Options Markets Affected Market Making and Trading Costs. Journal of Investment Management, Vol. 3, No. 2, Second Quarter 2005, Available at SSRN: https://ssrn.com/abstract=712184

Patrick De Fontnouvelle (Contact Author)

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

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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