WHY NASDAQ MARKET MAKERS AVOID ODD-8TH QUOTES

Recent studies argue that implicit collusion explains the tendency of Nasdaq market makers to avoid odd-eighth price quotes. This paper focu ses on the role that preference trading plays in determining quoted sp reads, Under the postulated effects of preference trading, an analysis of the relation between spreads and price fractions explains the pauc ity of odd-eighth quotes on Nasdaq. Empirical results from a comprehen sive data set show that exogenous economic characteristics explain the distribution of price fractions across securities, and illustrate the stability of that distribution over time. These results contradict em pirical results offered as support for the collusion hypothesis.