A comparison of transaction costs between competitive market maker and specialist market structures

Article Abstract:

A comparison of transaction costs between the American Stock Exchange (AMEX) and the Chicago Board Options Exchange (CBOE) is made based on an analysis of the bid-ask spreads of the two market structures. Bid-ask spreads are described as a function of the option price, option return standarddeviation, trade size, trading volume and market structure. For options of low volume, the specialist structure of the AMEX displayed transaction costs that were small. This difference between the AMEX and the competitive market maker structure of the CBOE appears to lessen as volume increases. The AMEX was also observed to perform a greater portion of trades within quotes. These observations provide serious implications of the adverse effects on economic efficiency of the continued encouragement of monopoly rights to trade options.

Security and commodity exchanges, Stock-exchange, Stock exchanges, American Stock Exchange L.L.C., Chicago Board Options Exchange Inc.

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Insider trading, liquidity, and the role of the monopolist specialist

Article Abstract:

The existence of insider trading affects the ratio of risk sharing and causes market makers to reduce market liquidity. The adverse effects of insider trading on market liquidity can be eased by monopolist specialists who average their profits across trades, unlike market makers who expect a zero profit on every trade.

Risk (Economics), Insider trading in securities, Insider trading (Securities), Liquidity (Finance), Market makers (Securities trading)

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