Order handling rules, tick size, and the intraday pattern of bid-ask spreads for Nasdaq stocks

In this study we perform a before-and-after analysis of intraday variation in bid-ask spreads surrounding two recent Nasdaq market reforms. We find that spreads declined significantly after the order handling rule changes and the magnitude of the decline is largest during midday. The results are consistent with our conjecture that, like on the NYSE, limit-order traders on Nasdaq play a significant role in the quote-setting process. Our empirical results also show that the magnitude of the spread reduction associated with the tick-size change is largest (smallest) during the last (first) hour of trading. We interpret these results using inventory and information models of the spread.