The contribution of market makers to liquidity and efficiency of options trading in electronic markets

Rafi Eldor, Shmuel Hauser, Batia Pilo, Itzik Shurki

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

Abstract

This paper examines the contribution of market makers to the liquidity and the efficiency of the options market in a unique setup of an order-driven computerized trading system, in which market makers and other participants operate under equitable conditions. The main findings are: (1) liquidity increased - a 60% increase in trading volume and a 35% decrease of bid-ask spreads; (2) the efficiency of shekel-euro options trading improved - deviations from put-call parity decreased significantly by 12%, and skewness decreased by about 30%. We also find that the net cost to the exchange is out weighted by the benefit to the trading public and that the presence of market makers encouraged trading between other participants far beyond their own trading.

Original languageEnglish
Pages (from-to)2025-2040
Number of pages16
JournalJournal of Banking and Finance
Volume30
Issue number7
DOIs
StatePublished - 1 Jul 2006

Keywords

  • Liquidity
  • Market makers
  • Trading efficiency

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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