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to maintain spreads by a new pricing convention. Most market makers are systemically posting their quotes in even sixteenths (two-sixteenths, four-sixteenths, etc.) rather than odd sixteenths (one-sixteenth, three-sixteenths, etc.). This has the effect of maintaining artificially wide bid/ask spreads (eighths rather than sixteenths). Pricing in one-sixteenth increments took effect in Nasdaq on June 2, 1997, for the purpose of facilitating narrower quoted spreads and enhancing competition. |
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These findings were contained in an ETA-commissioned study, "The Quotation Behavior of ECNs and Nasdaq Market Makers," conducted by Drs. Yusif Simaan (Associate Professor of Finance, Fordham University) and David K. Whitcomb (Professor of Finance at the Graduate School of Management of Rutgers University and President/CEO of Automated Trading Desk, Inc.). Covering the periods September 1526 and October 2031, 1997, the study examined, among other issues, the degree to which market makers attempt to avoid quote price competition in making Nasdaq markets. This practice of avoiding odd-increment quote prices identified by the Simaan-Whitcomb research is similar to the now famous Christie-Schultz finding in 1994 that market makers appeared to be engaging in tacit collusion by avoiding odd-eighth quotes. That paper led directly to the Department of Justice antitrust investigation, a class-action suit, an SEC censure of NASD, and the precedent-setting SEC Order Handling Rules, which were intended to restore price competition to the Nasdaq market. |
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Specifically, the Simaan-Whitcomb study found that the 10 major market makers posted their quotes in even sixteenths 93 percent of the time (with one market maker engaging in the practice 98 percent of the time). Even when a market maker was alone at the inside price (presumably the most competitive position), even sixteenths were posted 88 percent of the time. This compared poorly with "alone inside" orders posted on ECNs, which were found to be evenly distributed between odd sixteenths 49.7 percent of the time and even sixteenths 50.3 percent of the time. |
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