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Competition, interlisting and market structure in options trading

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  • Khoury, Nabil
  • Perrakis, Stylianos
  • Savor, Marko

Abstract

This paper applies a game theory approach to examine the effects of a market structure change in options trading from a monopoly to a Cournot-type oligopoly that occurred in two successive periods on the Montreal exchange. We analyze the intra-day behaviour of option bid-ask spreads and find that cross-listing has a differential impact on spreads, affecting quoted but not effective spreads under oligopoly. We also find that the impact of the change in structure on effective spreads comes mostly from an increase in limit orders and is consistent with a switch from Cournot to Bertrand-type strategic behaviour for such orders. We conclude that market structure effects within an options exchange are enough to realize most of the benefits of inter-market competition even in the context of market thinness.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 1 (January)
Pages: 104-117

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:1:p:104-117

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Contingent claims Market microstructure Interlisting Oligopoly games;

References

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  21. Patrick De Fontnouvelle & Raymond P. H. Fishe & Jeffrey H. Harris, 2003. "The Behavior of Bid-Ask Spreads and Volume in Options Markets during the Competition for Listings in 1999," Journal of Finance, American Finance Association, vol. 58(6), pages 2437-2464, December.
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