The Bid-Ask Spreads of NASDAQ Stocks that Quote on Even Eighths

Abstract

This paper studies the bid-ask spreads of actively traded Nasdaq stocks whose quotes lie almost exclusively on even eighths of a dollar. It has recently been hypothesized that the avoidance of odd eighth quotes is an implicitly collusive mechanism that results in larger spreads. This hypothesis is tested by comparing the spreads of these stocks to other Nasdaq stocks that do not use this mechanism. The tests are carried out using econometric methods appropriate for evaluating endogenously-delineated groups of this type. The percentage spreads of the stocks that tend to quote on even eighths are not systematically different than those of other stocks, once observable stock characteristics known to be economically related to competitive levels of the spread are taken into account. Thus, this research does not support the implicit collusion hypothesis.

JEL Classification: G11