The value of the specialist: Empirical evidence from the CBOE

Using intraday options data, this paper analyzes the “natural experiment” of the Chicago Board Options Exchange (CBOE) superimposing a specialist system on an existing multiple market maker system during 1999. We find support for the demand uncertainty literature which states that specialists are better able to resolve uncertainty about investor preferences. In particular, we find that quoted, current, and effective spreads decrease following the specialist system adoption. This translates into a $221 million annual savings for investors. We further find that following the switch, the market share of the CBOE increases significantly, suggesting that specialists use spreads to attract order flow.