Competition, interlisting and market structure in options trading
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Whitney K. Newey & Kenneth D. West, 1994.
"Automatic Lag Selection in Covariance Matrix Estimation,"
Review of Economic Studies,
Oxford University Press, vol. 61(4), pages 631-653.
- Newey, W.K. & West, K.D., 1992. "Automatic Lag Selection in Covariance Matrix Estimation," Working papers 9220, Wisconsin Madison - Social Systems.
- Kenneth D. West & Whitney K. Newey, 1995. "Automatic Lag Selection in Covariance Matrix Estimation," NBER Technical Working Papers 0144, National Bureau of Economic Research, Inc.
- Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-637, July.
- Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
- Sanford J. Grossman & Merton H. Miller, 1988. "Liquidity and Market Structure," NBER Working Papers 2641, National Bureau of Economic Research, Inc.
- Robert Brooks & Robert Faff & Tim Fry & E. Bissoondoyal-Bheenick, 2005. "Alternative beta risk estimators in cases of extreme thin trading: Canadian evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 15(18), pages 1251-1258.
- Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
- Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
- Fong, Kingsley Y.L. & Liu, Wai-Man, 2010. "Limit order revisions," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1873-1885, August.
- Cheol S. Eun & Sanjiv Sabherwal, 2003. "Cross-Border Listings and Price Discovery: Evidence from U.S.-Listed Canadian Stocks," Journal of Finance, American Finance Association, vol. 58(2), pages 549-576, 04.
- Frino, Alex & Gerace, Dionigi & Lepone, Andrew, 2008. "Liquidity in auction and specialist market structures: Evidence from the Italian bourse," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2581-2588, December.
- Kryzanowski, Lawrence & Zhang, Hao, 2002. "Intraday Market Price Integration for Shares Cross-Listed Internationally," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(02), pages 243-269, June.
- Vijh, Anand M, 1990. " Liquidity of the CBOE Equity Options," Journal of Finance, American Finance Association, vol. 45(4), pages 1157-1179, September.
- Boyle, Phelim P & Vorst, Ton, 1992. " Option Replication in Discrete Time with Transaction Costs," Journal of Finance, American Finance Association, vol. 47(1), pages 271-293, March.
- 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, 04.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
- Bessembinder, Hendrik & Kaufman, Herbert M., 1997. "A Comparison of Trade Execution Costs for NYSE and NASDAQ-Listed Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(03), pages 287-310, September.
- Hasbrouck, Joel, 1988. "Trades, quotes, inventories, and information," Journal of Financial Economics, Elsevier, vol. 22(2), pages 229-252, December.
- Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 441-468, December.
- Wei, Jason & Zheng, Jinguo, 2010. "Trading activity and bid-ask spreads of individual equity options," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2897-2916, December.
- Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-708, May.
- Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
- Hans R. Stoll, 2000. "Presidential Address: Friction," Journal of Finance, American Finance Association, vol. 55(4), pages 1479-1514, 08.
- Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
- Huang, Roger D. & Stoll, Hans R., 2001. "Tick Size, Bid-Ask Spreads, and Market Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(04), pages 503-522, December.
- Dumitrescu, Ariadna, 2010. "The strategic specialist and imperfect competition in a limit order market," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 255-266, January.
- Neal, Robert, 1987. " Potential Competition and Actual Competition in Equity Options," Journal of Finance, American Finance Association, vol. 42(3), pages 511-531, July.
- Peijie Wang & Trefor Jones, 2005. "A different approach to estimating betas of securities subject to thin trading and serial correlation," Applied Financial Economics, Taylor & Francis Journals, vol. 15(16), pages 1145-1152.
- 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. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:35:y:2011:i:1:p:104-117. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.