CLUSTERING AND COMPETITION IN ASSET MARKETS

Economists, financial commentators, regulatory agencies, and the legal community have recently criticized the Nasdaq Stock Market, Inc., bec ause there is greater clustering of stock quotations on even-eighths o n Nasdaq than on the New York Stock Exchange or the American Stock Exc hange, a phenomenon which critics attribute to collusion or some other defect in Nasdaq market structure. However, as this article demonstra tes, clustering occurs in varying degrees in many other incontestably competitive financial markets, including the NYSE, the AMEX, the Londo n Stock Exchange, the London gold market, and the international foreig n exchange market. This article provides a competitive theory of clust ering that emphasizes the effect of uncertainty, the size of transacti ons, volatility, and the informational and transactional roles of quot ations on the degree of clustering. In addition, the article examines how market structure can affect the degree of clustering and considers the relation between clustering, spreads, and investors' transactions costs.