Competition, Market Structure, and Bid-Ask Spreads in Stock Option Markets

Authors

  • Stewart Mayhew

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    • Terry College of Business, University of Georgia. I would like to thank Mark Rubinstein and the Berkeley Options Data Base for providing office space and computing resources. I would also like to thank Marc Lipson, Shane Corwin, Jeff Netter, Vassil Mihov, and an anonymous referee.

ABSTRACT

This paper examines the effects of competition and market structure on equity option bid-ask spreads from 1986 to 1997. Options listed on multiple exchanges have narrower spreads than those listed on a single exchange, but the difference diminishes as option volume increases. Option spreads become wider when a competing exchange delists the option. Options traded under a “Designated Primary Marketmaker” (DPM) have narrower quoted spreads than those traded in a traditional open outcry crowd. Effective spreads are found to be slightly narrower under the DPM than in the crowd, but only since 1992, and only on low-volume options.

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