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

Abstract

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 $.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%. 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.

JEL Classification: G14