Tick Size, Spreads, and Liquidity: An Analysis of Nasdaq Securities Trading near Ten Dollars

Quoted and effective bid-ask spreads on Nasdaq are two to four cents per share narrower, ceteris paribus, when stocks trade with a smaller tick size below $10 per share. There 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.

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