Do NASDAQ Market Makers Collude? Evidence from 19c-3 Stocks

Posted: 26 Aug 1999

See all articles by Lynn Doran

Lynn Doran

McDonough School of Business; Georgetown University - Department of Accounting and Business Law

Kenneth Lehn

University of Pittsburgh - Finance Group

Kuldeep Shastri

University of Pittsburgh - Finance Group

Date Written: May 1995

Abstract

Christie and Schultz find that bid-ask spreads are wider and odd-eighth quotes less frequent in the Nasdaq market versus the NYSE and AMEX. They suggest that collusion among market makers may account for these results, while others offer efficiency-based explanations. This paper attempts to distinguish the "collusion hypothesis" from "efficiency hypothesis" by examining trade and quote data from 19C-3 stocks, which trade in both the Nasdaq and NYSE markets. We find that spreads are significantly wider and spread revisions are significantly less frequent in the Nasdaq market compared with the NYSE, suggesting that microstructure imperfections, not collusion, may account for the wider spreads on Nasdaq. We also compare trade and quote data for the Nasdaq 19c-3 stocks with stocks with comparable trading volume that trade only on Nasdaq. We find that spreads are narrower and both odd-eight quotes and spread revisions are more frequent for the Nasdaq stocks which trade in both the Nasdaq and NYSE markets. While this result is consistent with the collusion hypothesis, we also find that pricing errors induced by microstructure considerations in the Nasdaq market are smaller for stocks that also trade simultaneously in the Nasdaq and NYSE markets. The results suggest that allegations of collusion are premature until the effects of microstructure considerations on spreads and quotes are better understood.

JEL Classification: G10

Suggested Citation

Lanz Doran, Lynn and Lehn, Kenneth and Shastri, Kuldeep, Do NASDAQ Market Makers Collude? Evidence from 19c-3 Stocks (May 1995). Available at SSRN: https://ssrn.com/abstract=6433

Lynn Lanz Doran

McDonough School of Business ( email )

Georgetown University
Washington, DC 20057
United States
202-687-2688 (Phone)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Kenneth Lehn

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-2034 (Phone)

Kuldeep Shastri (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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