A. Anand, D. Muravyev: Do auctions impact quote competition?

Auctions in options markets provide price improvement for retail traders, but they also allow market makers to trade without competing on displayed bid and ask prices. We study the effects of auctions on quote competition and bid-ask spreads. When an auction exchange is not at the best quote, it is significantly more likely to trade in auctions, and these trades are less likely to receive price improvement. These results are consistent with the use of auctions to match the best price on another exchange. Auction exchanges are less likely to quote at the best prices, particularly to improve the best quoted price. When auction use is restricted due to an exogenous rule change, quoted spreads decline, while the impact on effective spreads is more muted. Overall, we show that auctions reduce quote competition. 

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