Why do NASDAQ Market Makers Avoid Odd-Eighth Quotes?




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    • Christie is from the Owen Graduate School of Management, Vanderbilt University, and Schultz is from the Max Fisher College of Business, the Ohio State University. The article has benefitted from the comments and suggestions of Utpal Bhattacharya, Bernard Dumas, Thomas George, Lawrence Harris, Charles Lee, Craig Lewis, Kelly McNamara, Junius Peake, James Shapiro, Erik Serri, René Stulz (the editor), Hans Stoll, Ralph Walkling, Robert Wood, an anonymous referee, and seminar participants at Northwestern University, the Ohio State University, the University of Pennsylvania, Vanderbilt University, and the University of Southern California/University of California Los Angeles/NYSE 1994 Conference on Market Microstructure. Christie acknowledges the financial support of the Dean's Fund for Faculty Research at the Owen Graduate School of Management and the Financial Markets Research Center at Vanderbilt University. Schultz acknowledges the financial support from the Dice Center for Financial Research at the Ohio State University. All errors are the joint property of the authors.


The NASDAQ multiple dealer market is designed to produce narrow bid-ask spreads through the competition for order flow among individual dealers. However, we find that odd-eighth quotes are virtually nonexistent for 70 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 $0.25 and raises the question of whether NASDAQ dealers implicitly collude to maintain wide spreads.