The Contribution of Market Makers to Liquidity and Efficiency of Options Trading in Electronic Markets

16 Pages Posted: 29 Nov 2013

See all articles by Rafi (Rafael) Eldor

Rafi (Rafael) Eldor

Interdisciplinary Center (IDC) Herzliya - Arison School of Business

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management; Government of the State of Israel - Israel Securities Authority

Batia Pilo

Israel Securities Authority

Itzik Shurki

Government of the State of Israel - Israel Securities Authority

Date Written: August 1, 2005

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.

Keywords: Market makers; Trading efficiency; Liquidity

JEL Classification: G14; D23

Suggested Citation

Eldor, Rafi (Rafael) and Hauser, Shmuel and Pilo, Batia and Shurki, Itzik, The Contribution of Market Makers to Liquidity and Efficiency of Options Trading in Electronic Markets (August 1, 2005). Journal of Banking and Finance, Vol. 30, 2006, Available at SSRN: https://ssrn.com/abstract=2360573

Rafi (Rafael) Eldor (Contact Author)

Interdisciplinary Center (IDC) Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-952-7234 (Phone)
972-9-956-3616 (Fax)

Shmuel Hauser

Ben-Gurion University of the Negev - School of Management ( email )

P.O. Box 653
Beer-Sheva 84105
Israel
+972 2 651 3939 (Phone)
+972 7 6472896 (Fax)

Government of the State of Israel - Israel Securities Authority

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

Batia Pilo

Israel Securities Authority ( email )

Jerusalem 91341
Israel

Itzik Shurki

Government of the State of Israel - Israel Securities Authority ( email )

22 Kanfei Nesharim Street
Jerusalem 95464
Israel

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