The initiation and withdrawal of odd-eighth quotes among Nasdaq stocks: anempirical analysis

Christie and Schultz (1994), (Journal of Finance, 49, 1813-1840) find that market makers in many active Nasdaq stocks avoid odd-eighth quotes. This pa per studies 67 (58) Nasdaq stocks whose market makers initiate (withdraw) o dd-eighth quotes. These regime shifts are often completed within the span o f a day, and coincide with dramatic changes in dollar, percentage and effec tive spreads. In most cases, we are unable to identify comparable changes i n the costs of making markets. We do identify long-run changes in average p rices that may provide a partial explanation. However, we also find that th ese patterns are not shared by stocks traded in auction markets. (C) 1999 E lsevier Science S.A. All rights reserved.