Did NASDAQ market makers successfully collude to increase spreads? A reexamination of evidence from stocks that moved from NASDAQ to the New York or American Stock Exchanges

This paper examines all movements of stock from NASDAQ to the NYSE or Amex from 1983 through 1997 (1044 observations), as did Barclay (1997) for 472 stocks through 1992. He found a greater average decrease in spreads for NASDAQ stocks quoted on even eighths compared to stocks quoted on mixed eighths, from which he concluded that NASDAQ market makers had successfully colluded to widen spreads. A closer examination of the data and consideration of an important difference between how quotes are set on NASDAQ compared to the NYSE/Amex finds no support for the collusion hypothesis. Spreads on stocks with quoted spreads of one-eighth have no or limited scope for change, as this was the minimum quoted tick size on NYSE/Amex as well as on NASDAQ; hence inclusion of these observations reduces the average post-move spread decrease of mixed stocks, thereby biasing the finding. In fact, the higher average decrease in percentage effective spreads (%EPS) for even-eighth-quoted stocks is due entirely to the few stocks with high spreads (twelve eighths or higher). These stocks are relatively thinly traded and have small capitalizations and, when traded on NASDAQ (but not the NYSE/Amex) are subject to informed (adverse) trading. Furthermore, in the period after the alleged collusion was publicly identified and, presumably, stopped, there was no change in post-move decrease in %EPS on even-eighth stocks that supports the collusion hypotheses.Keywords: NASDAQ, market-maker collusion, even-eights quotes, microstructure, exchange listingJEL classification: G18