Misdirected by Rule 605: Bias in the Effective Bid-Ask Spread

I show that the effective spread measured relative to the spread midpoint overstates the true effective spread in markets with discrete prices and elastic liquidity demand. The average bias is 17% for S&P 500 stocks in general, and more than 80% for stocks with high relative tick size. The bias varies with exchange fees, implying that liquidity rankings of trading venues are biased too. I find that venues that charge high fees to liquidity suppliers appear artificially liquid, which may influence order routing decisions. The bias differs substantially across investor types, leading less sophisticated investors to overpay for liquidity.