RT Journal Article
SR Electronic
T1 The Effect of High-Frequency Market Making on Option Market Liquidity
JF The Journal of Trading
FD Institutional Investor Journals
SP 56
OP 76
DO 10.3905/jot.2016.11.4.056
VO 11
IS 4
A1 Suchi Mishra
A1 Robert T. Daigler
A1 Richard Holowczak
YR 2016
UL https://pm-research.com/content/11/4/56.abstract
AB The transition from manual to electronic markets in options paved the way for pricing efficiencies and improved liquidity from options high-frequency market making (HFMM). We find that HFMM reduces option bid–ask spreads, although with differences across both option and firm characteristics. Depth increases with the number of market maker quote revisions, conflicting with extant high-frequency research in other markets. The largest absolute change for spreads (depth) is for mid-size (large) companies. However, the change to penny quotes for options caused HFMM to have less of an effect on both spreads and depth, showing that penny quoting exacerbates the pricing efficiency generated by more frequent quote revisions.TOPICS: Exchanges/markets/clearinghouses, quantitative methods