Toward a National Market System for U.S. Exchange–listed Equity Options


  • Robert Battalio,

  • Brian Hatch,

  • Robert Jennings

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    • Robert Battalio is from the University of Notre Dame's Mendoza College of Business, Brian Hatch is from the University of Cincinnati's College of Business, and Robert Jennings is from Indiana University's Kelley School of Business. We thank an anonymous firm for providing the data. We also thank an anonymous referee, Amy Edwards, Richard Green (the editor), Frank Hatheway, Mike Hemler, Eugene Kandel, Paula Tkac, participants in the 2002 American Finance Association meeting, the 2001 Western Finance Association meeting, the Nasdaq-Notre Dame Microstructure Conference, and the Vanderbilt FMRC's Conference on Market Quality, and seminar participants at University of Notre Dame, Texas A&M University, Hofstra University, and the University of Southern California finance workshops for comments on previous versions of the paper. Finally, we thank Jerry O'Connell, Compliance Director at Susquehanna International Group for his comments on the paper.


In its response to the 1975 Congressional mandate to implement a national market system for financial securities, the Securities and Exchange Commission (SEC) initially exempted the option market. Recent dramatic changes in the structure of the option market prompted the SEC to revisit this issue. We examine a sample of actively traded, multiply listed equity options to ask whether this market's characteristics appear consistent with the goals of producing economically efficient transactions and facilitating “best execution.” We find marked changes between June 2000, when quotes are often ignored, and January 2002, when the market more closely resembles a national market.