Why Did NASDAQ Market Makers Stop Avoiding Odd-Eighth Quotes?





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    • Christie is from the Owen Graduate School of Management, Vanderbilt University, while Harris and Schultz are from the Max Fisher College of Business, The Ohio State University. The article has benefitted from the comments and suggestions of Clifford Ball, Stephen Buser, David Mayers, Kelly McNamara, Timothy Opler, Hans Stoll, René Stulz, Ralph Walkling, seminar participants at The Ohio State University and Vanderbilt University, and an associate editor of the Journal of Finance. 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.


On May 26 and 27, 1994 several national newspapers reported the findings of Christie and Schultz (1994) who cannot reject the hypothesis that market makers of active NASDAQ stocks implicitly colluded to maintain spreads of at least $0.25 by avoiding odd-eighth quotes. On May 27, dealers in Amgen, Cisco Systems, and Microsoft sharply increased their use of odd-eighth quotes, and mean inside and effective spreads fell nearly 50 percent. This pattern was repeated for Apple Computer the following trading day. Using individual dealer quotes for Apple and Microsoft, we find that virtually all dealers moved in unison to adopt odd-eighth quotes.