NASDAQ is a dealer (market maker) based market Dealers post “bid” and “ask” prices over computers or phones. The difference between the lowest ask and the highest bid is called “inside spread” which is the profits to the dealers. On the NASDAQ market, bid or ask quotes must be multiples of $1/8 if the bid price exceeds $10. The quote should end in either even-eighths: 0, 2/8, 4/8, 6/8 or odd-eighths: 1/8, 3/8, 5/8, 7/8.
What is the narrowest spread? What is the expected frequency of observing these quotes?
In 1994, two finance professors, W.G. Christie and P.H. Schultz were studying NASDAQ data and looked at 100 most actively traded stocks. They found that for 70 stocks including Intel and Microsoft, virtually all bids were in even eighths. They concluded that the 60 independent market makers had an understanding not to use odd-eighths
What was the minimum spread for these 70 stocks?