Market Microstructure

Paper Summary:

This paper examines the factors that effect liquidity, bid-ask spreads, in the "options" market. As investors try to develop a profitable stock option trading strategy, often they find that their actual trading capital is less than expected. This occurs because of bid-ask spreads. A trader can buy options at an ask price and sell it at a bid price, but the actual bid-ask spread can be 100% or more. The paper discusses various factors and the bid-ask process itself to provide a comprehensive understanding of the options market.

From the Paper:

"In examining the bid-ask quotes offered by specialists (or dealers) who face indirect competition from other specialists who trade in related assets, some specialists may control more than one asset. In a simple factor model, the optimal specialist control structure depends on whether the assets trade as substitutes or complements. In some situations it is beneficial to have specialist power concentrated within industries, in other situations, across industries, and in yet other situations, not to be concentrated at all (Ackert & Church, 1998)."

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