The value of the specialist: Empirical evidence from the CBOE

    Authors

    A. Anand;D. G. Weaver

    Comments

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    Abbreviated Journal Title

    J. Financ. Mark.

    Keywords

    specialists; market makers; bid-ask spreads; options; competition; TRADE EXECUTION COSTS; EQUITY OPTIONS; AUCTION MARKETS; NASDAQ; NYSE; COMPETITION; SPREADS; Business, Finance

    Abstract

    Using intraday options data, this paper analyzes the "natural experiment" of the Chicago Board Options Exchange (CBOE) superimposing a specialist system on an existing multiple market maker system during 1999. We find support for the demand uncertainty literature which states that specialists are better able to resolve uncertainty about investor preferences. In particular, we find that quoted, current, and effective spreads decrease following the specialist system adoption. This translates into a $221 million annual savings for investors. We further find that following the switch, the market share of the CBOE increases significantly, suggesting that specialists use spreads to attract order flow. (c) 2006 Elsevier B.V. All rights reserved.

    Journal Title

    Journal of Financial Markets

    Volume

    9

    Issue/Number

    2

    Publication Date

    1-1-2006

    Document Type

    Article

    Language

    English

    First Page

    100

    Last Page

    118

    WOS Identifier

    WOS:000237997300002

    ISSN

    1386-4181

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