Exchanges Give Option Traders Better Deals, But Not All Are Created Equal

Exchanges Give Option Traders Better Deals, But Not All Are Created Equal

UNIVERSITY PARK, PA-The structure of the options markets has been under-going significant evolution. Options that historically had traded on a single exchange now trade on multiple exchanges, with each exchange developing its own policies and practices.

Two Penn State professors recently studied how the market quality has changed since the growth of multiple listings. The paper, "Measuring Execution Quality in the Listed Option Market," was co-authored by Oliver Hansch, assistant professor of finance in Penn State's Smeal College of Business, and Frank Hatheway, assistant professor of finance in Penn State's Smeal College of Business.

"The measurement of execution quality in the listed option market is important to traders and regulators. Providing a high level of execution quality has become increasingly important to exchanges for competitive reasons following the multiple listing of option classes in 1999," says Hansch.

Using transaction cost measures computed from a sample of trade and quote data from all exchanges for 50 active option classes, the researchers find that multiple listings have, on average, improved execution quality, but also that differences exist across exchanges.

"Basically, this means that traders have benefited from multiple listings, but also that the order routing decision matters because some exchanges tend to give better deals than others," continues Hansch.

The researchers also found that the differences in exchange execution and trade reporting protocols potentially impede accurate comparisons.

The paper was presented at the Spring 2001 conference on Market Quality at Vanderbilt University, Nashville, TN.