Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?

Posted: 2 May 2000

See all articles by William G. Christie

William G. Christie

Vanderbilt University - Finance; Vanderbilt University - Law School

Paul H. Schultz

University of Notre Dame - Department of Finance

Abstract

The NASDAQ multiple dealer market is designed to produce narrow bid-ask spreads through competition for order flow among individual dealers. However, we find that odd-eighth quotes are virtually non-existent for 71 of 100 actively traded NASDAQ securities, including Apple Computer and Lotus Development. The lack of odd-eighth quotes cannot be explained by the negotiation hypothesis of Harris (1991), trading activity, or other variables thought to impact spreads. This result implies that the inside spread for a large number of NASDAQ stocks is at least $.25, and raises the question of whether NASDAQ dealers implicitly collude to maintain wide spreads.

JEL Classification: G14

Suggested Citation

Christie, Wiliam G. and Schultz, Paul H., Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?. Available at SSRN: https://ssrn.com/abstract=5656

Wiliam G. Christie

Vanderbilt University - Finance ( email )

401 21st Avenue South
Owen Graduate School of Management
Nashville, TN 37203
United States
615-343-7802 (Phone)
615-343-7177 (Fax)

Vanderbilt University - Law School

131 21st Avenue South
Nashville, TN 37203-1181
United States

Paul H. Schultz (Contact Author)

University of Notre Dame - Department of Finance ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States
219-631-3338 (Phone)
219-631-5255 (Fax)

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