Impairment in mismatch negativity (MMN) generation is a robust biological marker of schizophrenia. Understanding the physiological and pharmacological processes involved in its generation may therefore advance our understanding of this complex disorder. The present study tested if acute administration of nicotine modulates human auditory sensory memory as measured with MMN. ERP responses to tone duration deviants were recorded using a stimulation protocol with continuously changing (roving) standard stimuli in order to measure the effect of stimulus repetitions on encoding of new stimuli (MMN memory trace effect). Twenty healthy adult volunteers were randomly assigned to receive either a nicotine gum or placebo after a baseline ERP recording. Nicotine administration augmented MMN amplitude in the treatment group compared to the baseline recording, while no MMN change was found in the placebo group. The drug effect was due to a selective enhancement of a frontal positive potential to standard stimuli (from 80-200 ms post-stimulus), while the negativity to deviants remained unaffected. Furthermore, under nicotine stimulation this repetition positivity showed a more marked increase with stimulus repetition compared to baseline and placebo. These results have potential implications for schizophrenia by suggesting that nicotinic agonists could ameliorate patients' MMN deficits by improving stimulus encoding and sensory memory trace formation.