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

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  • Stewart Mayhew

    (Terry College of Business, University of Georgia)

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. Copyright The American Finance Association 2002.

Suggested Citation

  • Stewart Mayhew, 2002. "Competition, Market Structure, and Bid-Ask Spreads in Stock Option Markets," Journal of Finance, American Finance Association, vol. 57(2), pages 931-958, April.
  • Handle: RePEc:bla:jfinan:v:57:y:2002:i:2:p:931-958
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