AN ANALYSIS OF BID-ASK SPREADS ON AMERICAN-STYLE AND EUROPEAN-STYLE INDEX OPTIONS

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