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First, my knowledge is limited and I am still learning. I understand that each bank has various models to price options and that the prices vary based on these models. If this is the case, how are options priced and standarised on the exchange? How do they ensure there is no arbitrage?

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  • The MM will take the price from each buyer/seller and then post the 'BEST' buy/sell price. So in effect , on the exchange, only one set of prices (a.k.a) the best pric will be displayed
    – Victor123
    Oct 14, 2014 at 17:46

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On most listed options exchanges, e.g. in the US, there are market-makers. By default, the market makers post the bid-ask such that there is NO arbitrage opportunity.

On a few Asian exchanges, there are no market-makers and potentially the prices listed (by individuals / retail, or even institutions) due to supply-demand can create arbitrage opportunities but there are auto-algorithms run by many firms that will take these arbitrages out within a fraction of a second. Also, non market-maker option exchanges are fairly illiquid and very hard to find arbitrage opportunities in the first place.

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