Quoted and effective bid-ask spreads on Nasdoq are two to Four cents per sh
are narrower, ceteris paribus, when stocks trade with a smaller tick size b
elow $10 per share. Then is no evidence of a reduction in liquidity with th
e smaller tick size. The largest spread reductions occur for stocks whose m
arket makers avoid odd-eighth quotes. This finding provides support For mod
els implying that changes in the tick size can affect equilibrium spreads o
n a dealer market and indicates that the relation between tick size and mar
ket quality is more complex than the imposition of a constraint on minimum
spread widths. Journal of Economic Literature Classification Numbers: G39,
D34, N20. (C) 2000 Academic Press.