Why Nasdaq market makers avoid odd-eighth quotes

Recent studies argue that implicit collusion explains the tendency of Nasdaq market makers to avoid odd-eighth price quotes. This paper focuses on the role that preference trading plays in determining quoted spreads, Under the postulated effects of preference trading, an analysis of the relation between spreads and price fractions explains the paucity of odd-eighth quotes on Nasdaq. Empirical results from a comprehensive data set show that exogenous economic characteristics explain the distribution of price fractions across securities, and illustrate the stability of that distribution over time. These results contradict empirical results offered as support for the collusion hypothesis.