Competition Without Fungibility: Evidence from Alternative Market Structures for Derivatives
26 Pages Posted: 23 Feb 2006 Last revised: 23 Dec 2019
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: Suggested Citation
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