4. Regulatory Purgatory

In 1994, professors William Christie and Paul Schultz produced a research report that would become one of the biggest black eyes for the SEC up until that time. Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes? found that such quotes—think 1/8, 3/8, 5/8, or 7/8—were virtually nonexistent for 70% of the 100 most actively traded stocks. The minimum spread on many NASDAQ stocks was found not to be smaller than $0.25 in most instances.

Christie-Schultz stated, “We are unable to envision any scenario in which 40 to 60 dealers who are competing for order flow would simultaneously and consistently avoid using odd-eighth quotes without an implicit agreement to post quotes only on the even price fractions.” Although they didn’t ...

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