This paper examines 472 securities that were listed on Nasdaq and moved to the NYSE
or Amex. When Nasdaq market makers avoid odd-eighth quotes, bid-ask spreads are large
and decline dramatically with exchange listing. When market makers use both odd and
even eighths, spreads are smaller and decline only slightly with exchange listing.
The large spreads observed when Nasdaq market makers avoid odd-eighths cannot be
explained by security-specific characteristics. Instead, the results support the
conclusion that the avoidance of odd-eighth quotes is used as a coordination device
among Nasdaq market makers to maintain supra-competitive bid-ask spreads.