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Option Auctions

Author

Listed:
  • Terrence Hendershott
  • Saad Ali Khan
  • Ryan Riordan

Abstract

Wholesale market makers pay for retail options orders that must be executed on exchanges. Payment for order flow (PFOF) wholesalers compete via price improvement in exchange auctions. To attract retail orders, wholesalers run more auctions when their recent price improvement has been lower. However, auction price improvement lowers market maker revenues. Wholesalers earn revenues to pay PFOF in nonauction trades where their designated market maker status increases their execution priority. While some auctions produce substantial price improvement, most do not have multiple bidders offering meaningful price improvement. Overall, options market structure better promotes competition in auctions than in nonauctions.

Suggested Citation

  • Terrence Hendershott & Saad Ali Khan & Ryan Riordan, 2026. "Option Auctions," The Review of Financial Studies, Society for Financial Studies, vol. 39(3), pages 783-834.
    • Handle: RePEc:oup:rfinst:v:39:y:2026:i:3:p:783-834.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf043
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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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