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Link to paper

Option Auctions

Abstract:
Wholesalers use payment for order flow (PFOF) to buy retail options orders which must be executed on exchanges. PFOF wholesalers compete for retail orders via significant price
improvement in exchange auctions that have low market-maker revenues. PFOF wholesalers run more auctions with higher price improvement when their recent price  improvement has been lower. PFOF wholesalers primarily earn higher market-maker revenues to pay PFOF in
non-auction trades, which are more likely to occur on exchanges where the designated market makers is a PFOF wholesaler. Overall, our results suggest PFOF and options market structure better promote competition in auctions than in non-auctions.