Bid-Ask Spreads and the Avoidance of Odd-Eighth Quotes on NASDAQ: An Examination of Exchange Listings
Posted: 1 Jul 1998
Date Written: 1996
This paper provides additional evidence on the relation between bid-ask spreads and the avoidance of odd-eighth quotes on NASDAQ by examining 472 firms that moved from NASDAQ to the NYSE or Amex. When NASDAQ market makers avoid odd-eighth quotes, bid-ask spreads are large and decline dramatically with exchange listing. When market makers use both odd and even eighths, bid-ask spreads are smaller and decline only slightly with exchange listing. After exchange listing, there is little difference between these groups. The large spreads observed when NASDAQ market makers avoid odd-eighth quotes cannot be explained entirely by firm-specific characteristics. Instead, the results support the claim that the avoidance of odd-eighth quotes by NASDAQ market makers increases bid-ask spreads beyond the competitive level.
JEL Classification: G10
Suggested Citation: Suggested Citation