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Competition among Alternative Option Market Structures: Evidence from Eurex vs. Euwax


  • Sohnke M. Bartram

    (Lancaster University)

  • Frank R. Fehle

    (University of South Carolina)


We study option market design by providing a theoretical motivation and comprehensive empirical analysis of two fundamentally different option market structures, the Eurex derivatives exchange and Euwax, the world’s largest market for bank-issued options. These markets exist side-by- side, offering many options with identical or similar characteristics. We motivate the two market structures based on option investor clienteles which differ with respect to the probability of selling the option back to the dealer/issuer before maturity, which in turn affects the investors expected transaction costs. As suggested by the clientele argument, the most important empirical finding is that Euwax ask prices and bid prices are consistently higher than comparable Eurex ask prices and bid prices. The difference of the bid prices is larger, resulting in smaller Euwax bid-ask spreads, which makes Euwax preferable for investors with a high probability of early liquidation. We find that competition from one market reduces bid-ask spreads in the other market.

Suggested Citation

  • Sohnke M. Bartram & Frank R. Fehle, 2003. "Competition among Alternative Option Market Structures: Evidence from Eurex vs. Euwax," Finance 0307005, EconWPA, revised 06 Nov 2003.
  • Handle: RePEc:wpa:wuwpfi:0307005
    Note: Type of Document - PDF; prepared on IBM PC ; pages: 40

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    References listed on IDEAS

    1. Dietmar P.J. Leisen and Kenneth L. Judd, 2001. "A Partial Equilibrium Model of Option Markets," Computing in Economics and Finance 2001 219, Society for Computational Economics.
    2. Ter Horst, J.R. & Veld, C.H., 2002. "Behavioral Preferences for Individual Securities : The Case for Call Warrants and Call Options," Discussion Paper 2002-95, Tilburg University, Center for Economic Research.
    3. Bruno Biais & Thomas Mariotti, 2005. "Strategic Liquidity Supply and Security Design," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 615-649.
    4. Young-Hye Cho & Robert F. Engle, 1999. "Modeling the Impacts of Market Activity on Bid-Ask Spreads in the Option Market," NBER Working Papers 7331, National Bureau of Economic Research, Inc.
    5. Vijh, Anand M, 1990. " Liquidity of the CBOE Equity Options," Journal of Finance, American Finance Association, vol. 45(4), pages 1157-1179, September.
    6. Franke, Gunter & Stapleton, Richard C. & Subrahmanyam, Marti G., 1998. "Who Buys and Who Sells Options: The Role of Options in an Economy with Background Risk," Journal of Economic Theory, Elsevier, vol. 82(1), pages 89-109, September.
    7. Peter DeMarzo & Darrell Duffie, 1999. "A Liquidity-Based Model of Security Design," Econometrica, Econometric Society, vol. 67(1), pages 65-100, January.
    8. Chan, Howard Wei-Hong & Pinder, Sean M., 2000. "The value of liquidity: Evidence from the derivatives market," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 483-503, July.
    9. Franke, Günter & Weber, Martin, 2003. "Heterogeneity of Investors and Asset Pricing in a Risk-Value World," CEPR Discussion Papers 3832, C.E.P.R. Discussion Papers.
    10. Chan, Kalok & Chung, Y. Peter & Johnson, Herb, 1995. "The Intraday Behavior of Bid-Ask Spreads for NYSE Stocks and CBOE Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(03), pages 329-346, September.
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    More about this item


    Options; Market Design; Microstructure; Bid-Ask Spreads;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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