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

Söhnke M. Bartram and Frank R. Fehle
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Frank R. Fehle: University of South Carolina

Finance from EconWPA

Abstract: 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.

Keywords: Options; Market Design; Microstructure; Bid-Ask Spreads (search for similar items in EconPapers)
JEL-codes: G10 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: Written
Note: Type of Document - PDF; prepared on IBM PC ; pages: 40
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0307005

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