market microstructure of the pink sheets abstract we study the microstructure of the pink sheets and assess the ability of existing theory to capture salient features of this relatively unstructured and unregulated market clustering patterns in quotes quoted spreads and trade prices indicate that market participants have selected price dependent tick sizes for different stocks clustering intensity varies across stocks as a function of proxies for information availability similarly the bid ask spread varies as a function of volatility and liquidity these results suggest 1 microstructure research has established robust predictions of market attributes and 2 unstructured markets are able to develop at least some effective behavioral norms endogenously

clustering and competition in asset markets economists financial commentators regulatory agencies and the legal community have recently criticized the nasdaq stock market inc because there is greater clustering of stock quotations on even eighths on nasdaq than on the new york stock exchange or the american stock exchange a phenomenon which critics attribute to collusion or some other defect in nasdaq market structure however as this article demonstrates clustering occurs in varying degrees in many other incontestably competitive financial markets including the nyse the amex the london stock exchange the london gold market and the international foreign exchange market this article provides a competitive theory of clustering that emphasizes the effect of uncertainty the size of transactions volatility and the informational and transactional roles of quotations on the degree of clustering in addition the article examines how market structure can affect the degree of clustering and considers the relation between clustering spread

wage inflation unionization and monopoly power this paper uses panel data from 301 four digit manufacturing industries over the years 1959 to 1980 to examine how market structure affects the wage response to aggregate demand disturbances the authors use a new classical macroeconomic framework in which such shocks are identified with the unexpected component of money growth they find that product market power does not affect the response of wages to such shocks but that unionization does to be specific greater unionization leads to a faster wage response they also find that wages rise equiproportionately with expected money growth i e expected money is neutral copyright 1990 by blackwell publishing ltd

cognitive limitation and investment performance evidence from limit order clustering we hypothesize that cognitive limitation may be manifested in a disproportionately large volume of limit orders submitted at round number prices if investors use these numbers as cognitive shortcuts using detailed limit order data in the taiwan futures exchange we find that investors with lower cognitive abilities defined as higher limit order submission ratios at round numbers suffer greater losses in their round numbered and non round numbered limit orders market orders and round trip trades the positive correlation between cognitive ability and investment performance is monotonic and robust across futures and options markets in addition past trading experience helps mitigate cognitive limitation

is it time to split the s p 500 futures contract by october 1996 the value of the s p 500 index futures contract had grown to five times its value at its inception in april 1982 one way to make the contract more accessible to small investors and to smooth out trading is to split the contract splitting the contract could increase transaction costs although competition would probably limit the amount of the increase less clear is the need for increasing the minimum percentage tick size the current minimum tick size is small for s p 500 futures compared with that of other futures and also common stocks the larger tick size could affect volume however by increasing trading costs and reducing the willingness to trade

the price effects of liquidity shocks a study of the sec s tick size experiment abstract do stock prices of publicly listed companies respond to changes in transaction costs using the sec s pilot program that increased the tick size for approximately 1 200 randomly chosen stocks we find a stock price decrease between 1 75 and 3 2 for small spread stocks affected by the larger tick size relative to a control group we find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease we study channels of price variation due to changes in expected returns information risk investor horizon and liquidity risk the evidence suggests that trading frictions affect the cost of capital

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

negotiation and the ipo offer price a comparison of integer vs non integer ipos we investigate the pricing of 4 989 equity ipos with offer dates between 1981 and 2000 approximately three fourths of these ipos have integer offer prices average initial returns for ipos with integer offer prices are significantly higher 24 5 than those priced on the fraction of the dollar 8 1 this result is robust through time and after conditioning for other effects known to influence initial returns we hypothesize that integer vs fractional dollar ipos are the result of negotiations between the issuing firm and underwriter under this negotiation hypothesis the frequency of integer pricing should be an increasing function of the offer price and the degree of uncertainty surrounding the value of the firm empirical evidence supportive of the negotiation hypothesis is presented

a day end transaction price anomaly a large mean price change is observed on the last daily nyse transaction this suggests that closing prices may not consistently represent stock values transaction prices are studied to further characterize the day end price rise and to determine whether it is due to any limited subsample of stocks or dates the results indicate that the phenomenon is pervasive over most firms and days some evidence suggests that it is caused by a change in the frequency of ask prices at day end

third market reforms the overlooked goal of the sec s order handling rules in 1997 the securities and exchange commission enacted significant reforms in u s markets several studies document that the new order handling rules increased competition for nasdaq stocks but the reforms were designed with an additional goal in mind to increase quote competition for the trading of nyse listed securities on nasdaq i e third market trading an evaluation of the reforms in the third market indicates that they did not achieve this objective instead both quote quality and quoting frequency were diminished due primarily to elimination of the excess spread rule this suggests that more significant changes are needed to increase inter exchange competition

minimum price variations discrete bid ask spreads and quotation sizes exchange minimum price variation regulations create discrete bid ask spreads if the minimum quotable spread exceeds the spread that otherwise would be quoted spreads will be wide and the number of shares offered at the bid and ask may be large a cross sectional discrete spread model is estimated by using intraday stock quotation spread frequencies the results are used to project 1 16 spread usage frequencies given a 1 16 tick projected changes in quotation sizes and in trade volumes are obtained from regression models for stocks priced under 10 the models predict spreads would decrease 38 percent quotation sizes would decrease 16 percent and daily volume would increase 34 percent article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

term premia on euro rates there are at least two statistically firm results regarding international money and capital markets the first is the theory of interest rate parity is empirically valid for euro interest rates 8 the second is forward exchange rates are poor very likely biased predictors of future spot exchange rates 1 3 10 12 13 the former is a comforting finding in that it assures there are no unexploited arbitrage profits the latter is troubling to some because it might be a symptom of an inefficient market that interest rate parity holds suggests international exchange and money market arbitrageurs are fully exploiting all profit opportunities they are behaving rationally that forward exchange rates fail to predict future spot rates at least unbiasedly suggests the existence of some unknown mechanism which robs predictive ability in a naive rational expectations view of the world the failure of forward rates to be unbiased predictors of future spot rates implies either that there is some difference between interest rate pairs other than inflationary expectations or that forward rates do not capture expected inflation differences in any simple way see 9 this paper addresses the first issue if there are differences in interest rate pairs which do not solely reflect expected inflation divergences this must show up as a difference in real interest rates such could be the result of actual instantaneous real rates of identical risk being unequal in magnitude or what is more likely differences in term premia between interest rate pairs when periods greater than say one day are used in interest rate parity and forward rate prediction tests if there are differential term premia in interest rate pairs of say one month or longer then forward exchange rates will mispredict the future spot exchange rate by that margin

another day another collar an evaluation of the effects of nyse rule 80a on trading costs and intermarket arbitrage in 1990 the new york stock exchange amended its rule 80a to restrict stock index arbitrage on days of large price movements the authors find that rule 80a significantly curtails or collars index arbitrage activity in spite of this curtailment in index arbitrage volume they find that rule 80a appears to have had little overall impact on trading costs and intermarket linkage although pricing discrepancies between the markets do appear to be eliminated less quickly the authors results are consistent with the hypothesis that information is conveyed from one market to the other by means other than formal arbitrage copyright 1998 by university of chicago press

do investors prefer even eighth prices evidence from nyse limit orders abstract using a large sample of limit orders on nyse stocks we find that investors submit more limit orders with even eighth prices than odd eight prices however even though there are a greater number of even eighth limit orders the proportion of executing limit orders submitted with even prices is greater than those submitted with odd prices for a large portion of our sample we find that clustering on even prices is a positive function of stock price and various proxies for the dispersion in investors reservation prices the preference for even prices affects stock quotes investors are more likely to submit a quote improving limit order if the limit price is even and quoted depth is higher for even quotes than for odd quotes

price clustering in australian water markets the finding of clustering in financial prices on particular digits is common across a broad range of financial markets this article explores whether price clustering is also present in the case of the weekly market for seasonal water in rural victoria australia we find a similar degree of clustering in the seasonal water market this suggests that the trading activities of the market produce characteristics that are similar to more sophisticated and deeper financial markets

internalization and stock price clustering finnish evidence abstract internalization the practice of brokers executing trades in house is a significant phenomenon in the helsinki stock exchange during the continuous trading session 97 5 upstairs market trades are internalized the corresponding figure for after hours upstairs market trades is 73 1 the prices of internalized trades are somewhat more clustered than the prices of other trades during the continuous trading session but they are not more clustered than the prices of negotiated trades in the after hours upstairs market this suggests that finnish brokers do not use a more discrete set of prices for internalized trades than for other upstairs trades

the politics of digits evidence of odd taxation from the concept of odd pricing i e setting rightmost price digits below a whole number this paper advances the political counterpart of odd taxation using a panel of danish municipal taxes first the distribution of tax decimals is non uniform and resembles the distribution of price endings data second nine ending and other higher end decimals are found to be over represented which echoes odd pricing research it suggests that incumbents take voters biases into account and apply odd taxes to minimize the political costs of taxation while maximizing revenue attention should be given to how policy digits are arranged to exploit voters cognitive biases

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

stock splits tick size and sponsorship a traditional explanation for stock splits is that they increase the number of small shareholders who own the stock a possible reason for the increase is that the minimum bid ask spread is wider after a split and brokers have more incentive to promote a stock i document a large number of small buy orders following nasdaq and nyse amex splits during 1993 to 1994 i also find strong evidence that trading costs increase and weak evidence that costs of market making decline following splits this is consistent with splits acting as an incentive to brokers to promote stocks stock splits seem to be purely cosmetic changes with no real economic consequences after a two for one split each shareholder has twice as many shares but each represents a claim on only half as much of the corporation s assets and earnings however one real consequence of a stock split is that the tick size increases as a proportion of the stock s price except for a small number of very low priced issues u s stocks listed on an exchange or on nasdaq have a tick or minimum price variation of 0 125 during the sample period thus a decrease in the stock price and an increase in the relative tick size are indistinguishable consequences of a split some authors notably angel 1997 argue that splits are intended to move relative ticks to desired levels several empirical studies provide indirect evidence that is consistent with an increase in relative tick size as a motivation for splits desai and jain 1997 fama et al 1969 lakonishok and lev 1987 and others document that splits occur after stocks have experienced significant price increases or equivalently after relative tick sizes have decreased significantly angel shows that there is far less dispersion internationally in relative tick sizes than in stock prices

stock price clustering and discreteness stock prices cluster on round fractions clustering increases with price level and volatility and decreases with capitalization and transaction frequency clustering is pervasive price clustering will occur if traders use discrete price sets to simplify their negotiations exchange regulations require that most stocks be traded on eighths clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters halves or whole numbers an econometric model of clustering is derived and estimated projections from the results suggest that traders would frequently use odd sixteenths when trading low price stocks if exchange regulations permitted trading on sixteenths article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a note on the wang and wang measure of the quality of the compass rose abstract h wang and c wang visibility of the compass rose in financial asset returns a quantitative study j bank financ 26 2002 1099 1111 derive a measure of the visibility of the radial patterns that appear in a plot of current and past returns which are more commonly known as the compass rose in theory this measure should be positively related to the tick volatility ratio in practice however we find that this relationship does not hold for higher tick volatility ratios that are common to stock market data thus the use of this measure is limited in real world applications we propose a correction factor that improves the behaviour of the quality measure over higher tick volatility ratios however further research is required to fully identify and correct the problem

price clustering in bitcoin investor and media attention in bitcoin has increased substantially in recently years reflected by the incredible surge in news articles and considerable rise in the price of bitcoin given the increased attention there little is known about the behaviour of bitcoin prices and therefore we add to the literature by studying price clustering we find significant evidence of clustering at round numbers with over 10 of prices ending with 00 decimals compared to other variations but there is no significant pattern of returns after the round number we also support the negotiation hypothesis of harris 1991 by showing that price and volume have a significant positive relationship with price clustering at whole numbers

imperfect competition in financial markets an empirical study of island and nasdaq the competition between island and nasdaq at the beginning of the century offers a natural laboratory to study competition between and within trading platforms and its consequences for liquidity supply our empirical strategy takes advantage of the difference between the pricing grids used on island and nasdaq as well as of the decline in the nasdaq tick using the finer grid prevailing on their market island limit order traders undercut nasdaq quotes much more than they undercut one another the drop in the nasdaq tick size triggered a drop in island spreads despite the island tick already being very thin before nasdaq decimalization we also estimate a structural model of liquidity supply and find that island limit order traders earned rents before nasdaq decimalization our results suggest that perfect competition cannot be taken for granted even on transparent open limit order books with a very thin pricing grid

measuring uncertainty based on rounding new method and application to inflation expectations abstract the literature on cognition and communication documents that people use round numbers to convey uncertainty this paper introduces a method of quantifying the uncertainty associated with round responses in pre existing survey data i construct micro level and time series measures of inflation uncertainty since 1978 inflation uncertainty is countercyclical and correlated with inflation disagreement volatility and the economic policy uncertainty index inflation uncertainty is lowest among high income consumers college graduates males and stock market investors more uncertain consumers are more reluctant to spend on durables cars and homes round responses are common on many surveys suggesting numerous applications of this method

tick size share prices and stock splits minimum price variation rules help explain why stock prices vary substantially across countries and other curiosities of share prices companies tend to split their stock so that the institutionally mandated minimum tick size is optimal relative to the stock price a large relative tick size provides an incentive for dealers to make markets and for investors to provide liquidity by placing limit orders despite its placing a high floor on the quoted bid ask spread a simple model suggests that idiosyncratic risk firm size and visibility of the firm affect the optimal relative tick size and thus the share price in stock markets around the world the average price per share differs substantially the median u s stock for example sells for about 40 a typical london stock sells for about 5 7 50 and a typical hong kong share is about 2 furthermore when stock prices rise above a country s usual trading range firms often split their stocks to restore prices to that range why are these price ranges so different among countries these trading ranges can be remarkably stable over time during the half century from 1943 to 1994 the s p composite index increased over 1 500 percent yet the average new york stock exchange nyse share price was

the components of the illiquidity premium an empirical analysis of u s stocks 1927 2010 this paper implements a conditional version of the liquidity adjusted capm lcapm the conditional lcapm allows for a time varying decomposition of the total illiquidity premium into a level component and three risk components the estimated average annual total illiquidity premium for us stocks 1927 2010 is 1 74 2 08 which is substantially lower than in most previous studies the contributions from illiquidity level and illiquidity risk are 1 25 1 28 and 0 46 0 83 respectively of the three illiquidity risk components risk related to the hedging of wealth shocks is the most important while commonality risk is the least important the illiquidity premia are clearly time varying with peaks in downturns and crises but with no general tendency to decrease over time the level premium and the risk premium are significantly positively correlated at around 0 35 indicating that in periods of turbulence both illiquidity cost and illiquidity risk premia tend to be high

an explanation for the compass rose pattern abstract the compass rose pattern cannot be observed in daily returns in the spot foreign exchange forex market but is observable when intraday forex returns are used monte carlo simulations show that the pattern is visible only when the tick volatility ratio is above some threshold level a condition that is readily met with intraday returns

consolidation fragmentation and market performance this paper studies the impact of market consolidation or fragmentation on its performance examining four alternative models of exchange a consolidated clearing house fragmented clearing houses a monopoly dealer market and an interdealer market the effects of the market mechanism on the expected quantity traded the price variance faced by individual traders the quality of market price signals the expected gains from trade and the exchange implementation costs are studied

do competing specialists and preferencing dealers affect market quality we empirically demonstrate that the opportunities the boston stock exchange and the cincinnati stock exchange offer members to take the other side of their customers orders through affiliated market makers to internalize orders have little short run effect on posted or effective bid ask spreads this is true despite substantial movement of order flow away from the new york stock exchange when trading under one of these regional stock exchange programs begins these results contrast with the adverse effects of market fragmentation and internalization predicted by some theoretical market microstructure analyses and the popular financial press article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

price clustering on the shanghai stock exchange abstractwe investigate price clustering of intraday trades and negotiated block trades on the shanghai stock exchange sse from 2003 to 2009 prices of traded assets tend to cluster on certain final digits such as 0 and 5 in chinese culture 8 is associated with good luck and 4 with death so these numbers may be attractive or avoided we find that price clustering on the final digit of 0 is significantly higher during the morning call auction and early in the trading day we find no evidence of price clustering for the digit 8 but there is a significant dearth of prices ending in the inauspicious number 4 price clustering is significantly higher for negotiated block trades for which about 28 end with 0 multivariate analysis shows that price clustering is lower for more liquid firms but higher for firms with higher return volatility a higher price level or when the market is volatile our evidence supports the costly negotiation hypothesis our results also support the attraction hypothesis in t

penny wise dollar foolish buy sell imbalances on and around round numbers this paper provides evidence that stock traders focus on round numbers as cognitive reference points for value using a random sample of more than 100 million stock transactions we find excess buying selling by liquidity demanders at all price points one penny below above round numbers further the size of the buy sell imbalance is monotonic in the roundness of the adjacent round number i e largest adjacent to integers second largest adjacent to half dollars etc conditioning on the price path we find much stronger excess buying selling by liquidity demanders when the ask falls bid rises to reach the integer than when it crosses the integer we discuss and test three explanations for these results finally 24 hour returns also vary by price point and buy sell imbalances are a major determinant of that variation across price points buying selling by liquidity demanders below above round numbers yield losses approaching 1 billion per year this paper was accepted by brad barber teck ho and terrance odean special issue editors

market reaction to public information the atypical case of the boston celtics abstract the publicly traded boston celtics limited partnership shares provide a unique means of studying the impact of information on equity prices the results of the celtics basketball games significantly affect partnership share returns trading volume and volatility controlling for the expectedvalue of the signal using betting market point spreads has little effect on these relations investors respond asymmetrically to wins and losses and playoff games have a larger impact on returns than regular season games opening prices do not fully reflect game results consistent with previous findings that significant volatility is caused by traders acting on private information

priced on the note the case of japanese ipos this article examines the pricing of japanese ipos 54 26 are priced in 1 000 japanese yen increments the japanese yen jpy has denominations of banknotes and coins banknotes are in 1 000 2 00

quote based competition and trade execution costs in nyse listed stocks abstract this study examines quotations order routing and trade execution costs for seven markets that compete for orders in large capitalization nyse listed stocks the competitiveness of quote updates from each market varies with measures of the profitability of attracting additional order and with volatility and inventory measures the probability of a trade executing on each market increases when the market posts competitive quotes execution costs for non nyse trades when the local market posts competitive non competitive quotes are virtually the same substantially exceed costs for matched nyse trades collectively these results imply a significant degree of quote based competition for order flow and are consistent with off nyse liquidity providers using competitive quotations to signal when they are prepared to give better than normal trade executions

markup variability and flexibility theory and empirical evidence recent empirical studies have raised serious questions about the basic propositions about the cyclical behavior of prices and markups found in the traditional markup literature the administered price hypothesis and the standard volume target return pricing svtrp and wage cost markup wcm models which provide its theoretical support posit the following 1 the markup over average variable costs avc never declines during the expansion phase of the business cycle 2 in the short run or over the cycle prices and markups are less flexible more stable in highly concentrated industries than in industries of low concentration and 3 in highly concentrated industries prices and markups are insensitive to short run fluctuations in demand conditions and thus are solely determined by cost considerations the first two propositions deal with respectively the qualitative nature of the markup trajectory over the cycle and the relative flexibility of price and markup behavior 2 this paper summarizes and empirically tests an alternative theory of markup pricing it is concluded that over the typical business cycle 1 the markup rises from initial trough until the midexpansion and then declines until the terminal trough and 2 markup flexibility is positively related to the degree of demand competition this cyclical pattern of markup variability is shown to exist in major industry groups for all postwar cycles up to 1980 regression analysis reveals that in highly concentrated industries a positive relation exists between markup flexibility and the level of import competition and a proxy for the elasticity of demand the author is grateful to james r crotty peter t gottschalk william g shepherd and an anonymous referee for helpful comments on earlier versions of this paper 1 see weintraub 1959 chs 4 5 eckstein 1964 p 280 blair 1972 p 477 and weintraub 1978 ch 3 2 these two aspects of markup behavior will be referred to throughout this paper the markup trajectory refers to its dynamic time path over the business cycle its qualitative nature is summarized by its first and second time deriv

bid ask spreads in the interbank foreign exchange markets abstract this study provides evidence on quotations and bid ask spreads in the wholesale foreign exchange market and introduces a method to document variation in the placement of quotes relative to asset value i find that spreads widen with proxies for inventory carrying costs including forecasts of price risk and a measure of liquidity costs increases in spreads before nontrading periods can also be attributed to inventory costs the location of currency quotes in relation to value is not constant and the outcome of hypothesis tests regarding changes in currency value can be sensitive to allowances for variation in quote location

price clustering of chinese ipos the impact of regulation cultural factors and negotiation abstractduring june 2009 may 2012 the china securities regulatory commission csrc suspended window guidance that limits issue prices using this regime change as a natural experiment we test th

competition and collusion in dealer markets this article develops a game theoretic model to analyze market makers intertemporal pricing strategies we show that dealers who adopt noncooperative pricing strategies may set bid ask spreads above competitive levels this form of implicit collusion differs from explicit collusion where dealers cooperate to fix prices price discreteness or asymmetric information are not required for collusion to occur rather institutional arrangements that restrict access to the order flow are important determinants of the ability to collude because they reduce dealers incentives to compete on price public policy efforts to increase interdealer competition should focus on such restrictions

quotes order flow and price discovery the goal of this article is to examine the impact of 1975 congressional mandate to integrate the trading of nyse listed stocks the conclusions are most of the time the new york stock exchange nyse quote matches or determines the best displayed quote and the nyse is the most frequent initiator of quote changes non nyse markets attract a significant portion of their volume when they are posting inferior bids or offers indicating they obtain order flow for other reasons such as payment for order flow yet when a non nyse market does post a better bid or offer it does attract additional order flow

does anonymity matter in electronic limit order markets we develop a model in which limit order traders possess volatility information we show that in this case the size of the bid ask spread is informative about future volatility moreover if volatility information is in part private we establish that i the size of the bid ask spread and ii its informativeness about future volatility should change in the same direction when limit order traders identifiers stop being disclosed we test these predictions using data from the paris bourse as expected we find that the average quoted spread and its informativeness are significantly smaller when limit order traders identifiers are concealed these findings suggest that the limit order book is a channel for volatility information

price clustering and natural resistance points in the dutch stock market a natural experiment abstract this paper focuses on the tendency of stock prices to cluster at round numbers like 10 20 30 etc and to a lesser extent 5 15 25 etc and the related effect of round number price barriers prices pass round numbers less frequently than other numbers two competing hypotheses are tested using data from the dutch stock market of the period 1990 2001 after 1 january 1999 stock prices were listed in euros while guilders were still the currency of daily life until 2002 the aspiration level hypothesis predicts that round number effects in guilders will only slowly disappear the odd price hypothesis predicts an abrupt change in round number effects after 1 january 1999 generally the results are consistent with the odd price hypothesis

real versus nominal forecast errors in the prediction of foreign exchange rates abstract imposing a small number of common but strong assumptions allows the varianve of the ex post forecast error in forward exchange rates to be decomposed into its parts that part due to errors in forecasting relative inflation the nominal error and that part due to real shocks for a sample of large and small industrial countries we show that real shocks have been predominant in the post bretton woods world this result implies that models of exchange rate determination which do not explicitly incorporate real shocks are inappropriate for explaining recent exchange rate volatility

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

clustering in crude oil prices and the target pricing zone hypothesis abstract this paper studies the target pricing zone tpz hypothesis for crude oil by examining price clustering in the dollar digit it is hypothesized that price clustering occurs within an established tpz if opec is able to defend the upper and lower bounds through output changes the results show that prices strongly cluster around the dollar digit value of 9 within the tpz sub periods but not outside the sub periods furthermore the degree of clustering declines when production capacity utilization is high and when production significantly exceeds quotas consistent with opec s inability to defend the zone nine centered clustering also results in lower contemporaneous and next day volatility these results support the target pricing zone hypothesis of crude oil

do investors prefer round stock prices evidence from israeli ipo auctions abstract we find round number clustering in orders submitted by investors in israeli ipo auctions explanations offered for price clustering such as dealer collusion or implicit agreement to simplify negotiations cannot explain price clustering in this market therefore this is direct evidence that investors prefer round numbers

do liquidity measures measure liquidity abstract given the key role of liquidity in finance research identifying high quality proxies based on daily as opposed to intraday data would permit liquidity to be studied over relatively long timeframes and across many countries using new measures and widely employed measures in the literature we run horseraces of annual and monthly estimates of each measure against liquidity benchmarks our benchmarks are effective spread realized spread and price impact based on both trade and quote taq and rule 605 data we find that the new effective realized spread measures win the majority of horseraces while the amihud 2002 illiquidity and stock returns cross section and time series effects journal of financial markets 5 31 56 measure does well measuring price impact

earnings expectations investor trade size and anomalous returns around earnings announcements abstract we provide evidence that identifiable subsets of investors use significantly different information sets investors initiating large trades respond to analysts earnings forecast errors while investors initiating small trades respond to a less sophisticated signal that underestimates the implications of current earnings innovations for future earnings levels this suggests small investors exhibit the behavior that bernard and thomas journal of accounting and economics 13 305 340 theorize causes post earnings announcement drift we also use analysts forecasts to significantly improve the predictability of returns around earnings announcements previously documented by bernard and thomas finally results attempting to link return predictability to the prevalence of small investor trading are mixed

clustered pricing in the corporate loan market theory and empirical evidence abstract existing theories explaining security price clustering as well as clustering in the retail deposit and mortgage markets are incompatible with the clustering in the corporate loan market we develop a new theoretical model that the attitude of the lender toward the uncertainty about the quality of the borrower leads to the clustering of spreads our empirical results support our theoretical model and we find that clustering increases with the degree of uncertainty between the lender and the borrower in contrast clustering is less likely when the uncertainty about the quality of the borrower has been reduced through repeated access and through prior interactions of the lender and the borrower

penny pricing and the components of spread and depth changes abstract recent studies show that decimal pricing led to significant reductions in the spread and depth on the nyse in this paper we examine how the observed changes in the spread and depth can be attributed to different factors we show that stocks with higher proportions of one tick spreads and odd sixteenth quotes and more frequent trading before decimalization experienced larger declines in the spread and depth afterwards we interpret this result as evidence of reduced binding constraints and increased price competition under decimal pricing we also find that decimal pricing led to nontrivial changes in select stock attributes and that these changes exerted an additional impact on spreads and depths our results suggest that sub penny pricing may further reduce the spreads of high volume low risk or low price stocks

why markets should not necessarily reduce the tick size abstract this paper studies the consequences of a tick size change on the paris bourse thus providing a natural experiment on an order driven market the change raised the tick size for some stocks and lowered it for other in contrast with us exchanges results this generated neither a reduction in liquidity provision for large trades nor a change in the spread based on this paper and on us results it appears an increasing but convex relationship between the relative tick size and the relative spread thus it implies that a new pricing grid does not necessarily lead to change execution costs but it changes the level of transparency in the liquidity supply

tick size bid ask spreads and market structure we propose a link between market structure and the resulting market characteristics tick size bid ask spreads quote clustering and market depth we analyze transactions data of stocks traded on the london stock exchange a dealer market we conclude that market charateristics are endogenous to the market structure the london dealer market does not have a mandated tick size and it exhibits higher spreads higher quote clusterings and higher market depth than the nyse auction market clustering of trade prices is similar in london and new york

a psychological reexamination of the bertrand paradox the bertrand paradox describes a situation in which two competing firms reach an outcome where both price at marginal cost in laboratory experiments this equilibrium is not generally observed existing empirical works on bertrand competition have found evidence for boundedly rational models we find that such models are useful in organizing behavior in early stages of the game but less so in later stages we show that a new model coarse grid nash equilibrium based on the assumption that subjects discretize the strategy space explains the data better

make take structure and market quality evidence from the u s options markets we examine the make take structure which compensates liquidity suppliers and charges liquidity demanders in the options markets where it competes with a traditional structure that uses payments for order flow using the introduction of the make take structure as an event we find that execution costs including fees for liquidity demanders decline after the event for the affected options that the make take structure encourages market makers to improve quoted prices and that brokers change their routing behavior to include fees in the routing decision the decline in execution costs is consistent with the benefits of the increased quote competition from the make take structure prevailing over the fees the structure charges to liquidity demanders this paper was accepted by wei jiang finance

implications of the discreteness of observed stock prices stock prices on the organized exchanges are restricted to be divisible by 1 8 therefore the true price usually differs from the observed price this paper examines the biases resulting from the discreteness of observed stock prices it is shown that the natural estimators of the variance and all of the higher order moments of the rate of returns are biased an approximate set of correction factors is derived and a procedure is outlined to show how the correction can be made the natural estimators of the beta and of the variance of the market portfolio on the other hand are nearly unbiased the behavior of stock prices has been an issue of interest to the financial economist for many years this interest resulted in a growing number of empirical studies which attempt to estimate this behavior e g blattberg and gonedes 2 fama 6 fama and roll 7 8 barnea and downes 1 to date stock price behavior is estimated under the assumption that the observed trading price is the true equilibrium price however observed stock prices and stock price changes on the organized exchanges are restricted to multiples of 1 8 of a dollar 1 therefore if the true distribution of stock prices is continuous an observed trading price can be different from the true price this paper examines the biases in estimating the moments of stock price changes caused by the discreteness of observed stock prices the major focus of the paper is in noting this problem providing a model which explains the source of these biases and quantifying their size section i demonstrates that due to the discrete nature of observed stock prices the natural estimators for the variance and for the higher order moments of the rate of returns are biased upward this bias is larger for stocks with lower prices and smaller standard deviation for instance assuming that the standard deviation a is 0 001 the stock price is one dollar the true probability distribution of stock prices is lognormal and the observed prices are as close as possible to the true prices then the natural estimator of r has expectation 0 01400 hence it is biased upward by 1300 significant biases have important implications in option pricing we derive an approximate set of correction factors which can be applied to the

extreme price clustering in the london equity index futures and options markets price clustering and optimal tick sizes have recently been topics of substantial public policy interest and this paper presents evidence which is relevant to both debates around 98 of quoted and traded prices for liffe stock index derivatives are found to occur at even ticks we report that clustering increases with volatility and transaction frequency and decreases with trade size and find that the proportion of odd ticks is significantly lower near the market open and higher near the close further an inverse relationship is reported between bid ask spreads and the number of odd ticks and spreads cluster at even tick values this evidence of extreme price clustering is the first to be presented for financial derivatives the results support both the price resolution and the negotiation hypotheses of price clustering

symposium on market microstructure focus on nasdaq abstract this special issue of the journal of financial economics includes six articles that analyze the market microstructure of nasdaq in various ways the question of the costs of trading on nasdaq has become contentious in both the academic and legal regulatory arenas since the christie and schultz 1994 article first noted that many actively traded nasdaq stocks were almost never quoted on odd eights the articles in this symposium bring new and interesting insights to this debate

what makes carbon traders cluster their orders abstract the ability to trade large amounts of assets at low costs could be hindered when the size of the orders is concentrated at specific trade sizes this paper documents evidence of size clustering behavior in the european carbon futures market and analyzes the circumstances under which it happens our findings show that carbon trades are concentrated in sizes of one to five contracts and in multiples of five we have also demonstrated that more clustered prices have more clustered sizes suggesting that price and size resolution in the european carbon market are complementary and that carbon traders round both the price and the size of their orders finally the analysis of the key determinants of the size clustering reveals that traders use a reduced number of different trade sizes when uncertainty is high market liquidity is poor and the desire to open new positions and cancel old ones is very strong

stock price clustering on option expiration dates abstract this paper presents striking evidence that option trading changes the prices of underlying stocks in particular we show that on expiration dates the closing prices of stocks with listed options cluster at option strike prices on each expiration date the returns of optionable stocks are altered by an average of at least 16 5 basis points which translates into aggregate market capitalization shifts on the order of 9 billion we provide evidence that hedge rebalancing by option market makers and stock price manipulation by firm proprietary traders contribute to the clustering

an analysis of intraday patterns in price clustering on the tokyo stock exchange abstract stock prices tend to cluster at round numbers a phenomenon observed in many markets using tick by tick transaction data this article studies price clustering on the tokyo stock exchange which is a computerized limit order market as for the intraday pattern the degree of price clustering is greatest at the market opening then it decreases during the first half hour and reaches a stable level it does not increase again near the market closing there is no clear difference in clustering between call auctions and continuous auctions

robust structure without predictability the compass rose pattern of the stock market plotting daily stock returns against themselves with one day s lag reveals a striking pattern evenly spaced lines radiate from the origin the thickest lines point in the major directions of the compass this compass rose pattern appears in every stock it is caused by discreteness however counter examples demonstrate that the existence of exchange imposed tick sizes e g eighths is neither necessary nor sufficient for the compass rose the compass rose cannot be used to make abnormal profits it is structure without predictability among other consequences the compass rose may bias estimation of arch models and tests for chaos technical analysts attempt to identify recurring patterns in stock prices e g edwards and magee 1992 similarly chaos researchers embed time series of stock returns into multi dimensional spaces and attempt to identify lowdimensional attractors e g barnett and chen 1988 figure 1 the hope is that with structure comes predictability and abnormal profits in fact neither of these literatures has yet discovered indisputable structure we follow a procedure similar to a chaos researcher s we look at a simple scatter diagram of daily stock returns plotted against themselves with one day s lag we document a structural relationship the compass rose that is strikingly geometrical in contrast to the products of technical analysis and chaos theory the structure we find is indisputably present in every stock unfortunately the compass rose cannot be used for predictive purposes by market participants it is an artifact of market microstructure it follows that even a successful search for significant structure in stock market data need not enhance predictability nor lead to abnormal profits an equally important lesson is that microstructure effects can be spectacular in daily and even weekly data several areas for future research are given these include potential biases caused by the compass rose in the estimation of autoregressive conditional heteroskedasticity arch models and in a standard test for chaos

how does public information affect the frequency of trading in airline stocks abstract this paper examines how firm specific and macroeconomic announcements affect transaction rates in u s airline stocks using a version of the autoregressive conditional hazard framework of hamilton and jorda 2002 that incorporates market microstructure variables we show that on average trading intensity spikes prior and consequent to macroeconomic announcements but decreases around firm specific releases further when we use intraday crude oil futures returns as a proxy for industry relevant and globally important news we find that their effects are statistically significant with higher oil futures returns increasing the probability of trade

what s not there odd lots and market data we investigate odd lot trades in equity markets odd lots are increasingly used in algorithmic and high frequency trading but are not reported to the consolidated tape or in databases such as taq in our sample the median number of odd lot trades is 24 but in some stocks odd lots are 60 or more of trading odd lot trades contribute 35 of price discovery consistent with informed traders using odd lots to avoid detection omitting odd lot trades leads to inaccuracies in order imbalance measures and makes sentiment measures unreliable excluding odd lots from the consolidated tape raises important regulatory issues

an analysis of trade size clustering and its relation to stealth trading abstract nyse and nasdaq trades increasingly cluster on multiples of 500 1 000 and 5 000 shares such clustering varies over time and across stocks and tends to increase with the level of trading activity furthermore rounded trades tend to have more persistence both in occurrence and in trade initiation finally medium sized rounded trades tend to have greater relative price impact than large rounded trades from these observations we surmise that trade size clustering is consistent at least in part with the actions of stealth traders who tend to use medium sized rounded transactions in an attempt to disguise their trades

bank deposit rate clustering theory and empirical evidence the market prices of stocks and other assets tend to cluster on round fractions a similar clustering is found in the interest rates paid on retail bank deposits however the theoretical rationales given for asset price clustering are incompatible with the clustering of retail deposit rates this paper proposes a theory based on depositors limited recall it shows that when banks exploit this phenomenon deposit rates will tend to be set at round fractions and will be relatively sticky at these levels the implications of this theoretical model are tested using money market deposit account and retail certificate of deposit interest rate data from a sample of more than 500 banks