How Will the TSX/ Montreal Merger Affect Spreads?

CFA and an Advanced Trading reader, Bud Haslett of Miller Tabak & Co., emailed me the following commentary. I'd like to ask our readers the question he asked me: Do you think the merger will result in narrower spreads and increased option volume for the combined organization?

Below is Bud's commentary:Impact of Toronto and Montreal Exchange Merger On Derivatives Trading in Canada

In August of 1999, a CBOE firm began trading options on Dell Computer that previously traded only on the Philadelphia Exchange (PHLX). This resulted in "all hell breaking loose" and a multiple listing war that ultimately led to most active issues trading on all US option exchanges. The resulting competition between the exchanges led to narrower bid/offer spreads and an explosion in US option trading volume.

During the same year (1999), the Toronto and Montreal exchanges split functions with cash equities trading in Toronto and derivatives trading in Montreal. This agreement was to last for 10 years, finally ending in March of 2009, when the exchanges could trade both types of instruments.

It was my feeling that when the Canadian markets experienced multiple listing in options, this too would lead to narrower bid/offer spreads and an exposion in option trading volume for both exchanges (just like it did in the US). We will now, however, never know the impact of multiple listing as the exchanges announced a merger where they will join forces to form the TMX Group. Derivatives trading will remain in Montreal and the exchanges will be able to achieve various efficiencies from the combination.

The Montreal Exchange has always done a great job with their derivatives program, but the liquidity providers usually have relatively wide bid/offer spreads that constrict option volume. Does anyone have any comments or opinions on whether the merger will result in narrower spreads and increased option volume for the combined organization?CFA and an Advanced Trading reader, Bud Haslett of Miller Tabak & Co., emailed me the following commentary. I'd like to ask our readers the question he asked me: Do you think the merger will result in narrower spreads and increased option volume for the combined organization?

Below is Bud's commentary: