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November 1, 2003

Professor Christie Calls for a Nickel Tick

By John A. Byrne

Professor William G. Christie, the academic whose work on Nasdaq price collusion inspired lawmakers in Washington to bring in the controversial order handling rules, says it's time to fix spreads again. But this time with a nickel increment.

Almost ten years after Christie and his colleague, Professor Paul Shultz, demonstrated that market makers maintained quote increments of $0.25 in 70 of the 100 most active Nasdaq stocks - by avoiding odd-eighth quotes - Christie says penny pricing has gone too far.

In a comment some might regard as ironic, Christie told Traders Magazine that his position in the early 90s was different from his stand today. He said his previous research was intended to remove price-fixing from Nasdaq and restore competition.

"The current debate concerns the costs and benefits of two tick sizes that didn't exist in 1994," said Christie, referring to the year of his co-authored research. "While a $0.01 price increment benefits the smallest of investors, the issues of liquidity and price priority become paramount."

Christie said if the equity markets were to move, with SEC approval, from a minimum tick size of $0.01 to $0.05, it would make the search by institutions for liquidity easier, thereby reducing their costs. The losers, he said, are investors in stocks whose "true equilibrium spread" is under $0.05.

Still, Christie noted, a move to a tick size of $0.05 will bring back the benefits of price priority and liquidity for all issues. "My concern is that the pendulum has swung too far towards the smallest of investors," he added. "Moving the tick size back to $0.05 seems a reasonable tradeoff that I hope the markets and regulators will seriously discuss."

[See Trading Viewpoint, A Minimum Increment Solution].

-John A. Byrne