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Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?

  • Christie, William G
  • Schultz, Paul H

The NASDAQ multiple dealer market is designed to produce narrow bid-ask spreads through the competition for order flow among individual dealers. However, the authors 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 L. 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. Copyright 1994 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 49 (1994)
Issue (Month): 5 (December)
Pages: 1813-40

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Handle: RePEc:bla:jfinan:v:49:y:1994:i:5:p:1813-40
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