The evolution of market share among the U.S. options market platforms

Abstract

Abstract The U.S. equity options market has shown rapid growth, characterized by increased trading volume and new entrants in recent years. As competition in the options market has intensified, each trading venue has attempted to differentiate itself with a unique value proposition aimed at gaining market share. Using a sample that covers key events including the introduction of two new trading venues, we analyze the competition for trading volume, investigate the characteristics of trades and execution costs on the exchanges and examine the evolution of market share in the options industry. We find that exchange market share is positively related to execution quality and quote competition indicators and negatively related to execution costs, while exchanges that use the maker–taker model as their primary pricing model account for, on average, a lower market share than exchanges that use alternative pricing models. Given that exchanges increasingly compete using innovative methods involving market structure such as different order types, fee structures, pricing methods, and priority rules for matching orders, our finding that higher market quality in the form of higher execution quality, lower execution costs, and competitive quotes translates into higher market share is especially noteworthy.