An analysis of bid–ask spreads on American-and European-style index options

Abstract

The UK option market is unique in trading both American-style and European-style contracts on the same underlying stock index. We use high-frequency quote data to examine the magnitude and distribution of the bid–ask spreads on these contracts, which are found to be at least partly determined by relative trading volume. We also present comparisons with the limited previous evidence on the level of option bid–ask spreads in the UK and USA. We find that increased trading volumes in the UK index options in recent years have not clearly reduced spreads.