Tick size, spreads, and liquidity: An analysis of Nasdaq securities trading near ten dollars

Quoted and effective bid-ask spreads on Nasdoq are two to Four cents per share narrower, ceteris paribus, when stocks trade with a smaller tick size below $10 per share. Then is no evidence of a reduction in liquidity with the smaller tick size. The largest spread reductions occur for stocks whose market makers avoid odd-eighth quotes. This finding provides support For models implying that changes in the tick size can affect equilibrium spreads on a dealer market and indicates that the relation between tick size and market quality is more complex than the imposition of a constraint on minimum spread widths. Journal of Economic Literature Classification Numbers: G39, D34, N20. (C) 2000 Academic Press.