The effect of multiple listings on the bid-ask spread in option markets: The case of Montreal exchange

In this article, we examine the effect of multiple listings of options on their bid-ask spread, by comparing options contracts listed only on the Montreal Exchange with those interlisted on that exchange and on a U.S. exchange as well. Using a statistical procedure adapted to panel data and two models for the determination of the bid-ask spread, we find that the bid-ask spreads of Montreal options interlisted in U.S. markets are narrower than those of non-interlisted options. That advantage tends to disappear, however, with an increase in option price and to increase with its volatility, but is not affected by the volume of transactions in the option market. The analysis also shows that interlisting may result in time lags in the convergence of quotes between Montreal and the U.S. markets. Moreover, our evidence shows that with interlisting, volume shifts to the option market where trading in the underlying security is concentrated, irrespective of the location where the option was first introduced. (C) 2002 Wiley Periodicals, Inc.