BID-ASK SPREADS AND THE AVOIDANCE OF ODD-8TH QUOTES ON NASDAQ - AN EXAMINATION OF EXCHANGE LISTINGS

This paper examines 472 securities that were listed on Nasdaq and move d to the NYSE or Amex. When Nasdaq market makers avoid odd-eighth quot es, bid-ask spreads are large and decline dramatically with exchange l isting. When market makers use both odd and even eighths, spreads are smaller and decline only slightly with exchange listing. The large spr eads observed when Nasdaq market makers avoid odd-eighths cannot be ex plained by security-specific characteristics. Instead, the results sup port the conclusion that the avoidance of odd-eighth quotes is used as a coordination device among Nasdaq market makers to maintain supra-co mpetitive bid-ask spreads.