Skip to content
All library documents

NASDAQ Odd-Eighth Quotes and the Evidence of Wide Bid-Ask Spreads

Article Quant Q&A · Author: mike
Read the original

Summary

The document points to academic research on whether NASDAQ market makers avoided odd-eighth price quotes in a way that kept bid-ask spreads wide. It identifies a 1994 study by Christie and Schultz, which examined quoting patterns in actively traded stocks and the possibility of implicit coordination among dealers.

The cited abstract describes a sharp change after news reports publicized the research: dealers began using odd-eighth quotes more often, and inside and effective spreads fell substantially for several named stocks. Similar behavior was observed in additional stocks on a subsequent trading day, and dealer-level quotes suggested widespread movement toward odd-eighth quoting. This gives a concrete example of how quote increments and market-maker behavior can affect trading costs. The document is a brief pointer to the paper and its abstract, rather than a full account of the lawsuit mentioned in the question; it does not establish that the research itself resulted in a successful suit or provide details of any legal case.

Key ideas

  • The cited research examined NASDAQ market makers’ avoidance of odd-eighth quotes.
  • Researchers considered whether this quoting pattern kept spreads wider in active stocks.
  • Following public reports of the findings, odd-eighth quoting increased and spreads declined in the examples described.
  • The document identifies the research but does not verify the alleged lawsuit or its outcome.

Tags

EquitiesMarket microstructureExecutionUS markets
Full text
# Looking for analysis of NASDAQ suit?


# Looking for analysis of NASDAQ suit?












I may have every particular detail of this wrong, including the exchange, but years ago, maybe as long as 20, there was a successful suit against NASDAQ based on research by academics showing their bid-ask spreads were too wide.

Does anyone recall the suit, the academics who were involved, and maybe where the research appeared ?

## Answer by BlueTrin (score 6)

https://quant.stackexchange.com/a/4453

Are you after the famous paper from Christie and Schultz?

- Christie,W., Schultz,P., 1994. Why do NASDAQ market makers avoid odd-eighth quotes? Journal of Finance 49,1813–18 40.

From the 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 $0.25 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 percent. 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.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.