Multidimensional Competition on NASDAQ: Did Traders Gain When Dealers Stopped Avoiding Odd-Eighth Quotes?

16 Pages Posted: 31 Jul 1996

Date Written: June 1996

Abstract

Apparently spurred by allegations of collusive pricing, dealers in the NASDAQ stocks Apple, Amgen, Cisco, and Microsoft began offering odd-eighth quotes in May 1994. Intel dealers followed shortly thereafter. If the associated dramatic reduction in quoted spreads represented a move to competitive pricing of transaction services, investors would have increased their trading volume. If, by contrast, wide spreads and avoidance of odd-eighth quotes motivated dealers to compete on dimensions such as payments for order flow, immediacy, depth, and other services, the fall in spreads would have undercut such inducements. It is possible that the wide spreads associated with the avoidance of odd-eighth quotes supported an efficient set of transaction services and prices, in which case the true cost of transacting would have increased when dealers began offering odd-eighth quotes. In this case, volume would have decreased. After correcting for NASDAQ-wide and other exogenous determinants of volume, we find a statistically significant increase in the five affected stocks, as predicted by the collusion hypothesis. The volume increase is, however, extremely small compared to the fall in spreads, which suggests that transaction services were also reduced.

JEL Classification: G10, L41

Suggested Citation

Garvey, Gerald T. and McCorry, Michael S., Multidimensional Competition on NASDAQ: Did Traders Gain When Dealers Stopped Avoiding Odd-Eighth Quotes? (June 1996). Available at SSRN: https://ssrn.com/abstract=1034 or http://dx.doi.org/10.2139/ssrn.1034

Gerald T. Garvey (Contact Author)

Blackrock ( email )

Level 37, Chifley Tower
2 Chfiley Square
Sydney, NSW 2000
Australia
+61 2 9272 2388 (Phone)

Michael S. McCorry

affiliation not provided to SSRN

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