Title

The Value Of The Specialist: Empirical Evidence From The Cboe

Keywords

Bid-ask spreads; Competition; Market makers; Options; Specialists

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. © 2006 Elsevier B.V. All rights reserved.

Publication Date

5-1-2006

Publication Title

Journal of Financial Markets

Volume

9

Issue

2

Number of Pages

100-118

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.finmar.2005.12.002

Socpus ID

33646086723 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/33646086723

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