Market Information and Price Clustering: Evidence from SEC Rule 201
33 Pages Posted: 9 Jan 2015 Last revised: 14 Dec 2018
Date Written: January 1, 2015
We provide a novel test of information-based theories of price clustering by examining trade, order, and inside quote price clustering during periods when information is removed from the market. We use a natural experiment of short-sale restrictions resulting from Securities and Exchange Commission (SEC) Rule 201 to more effectively determine the impact of information on price clustering, and in turn, more appropriately test the negotiation hypothesis. We find evidence of increased price clustering for trades, orders, and inside quotes during short-sale restrictions. Additionally, we document a dramatic increase in price clustering immediately before a Rule 201 trigger that is reduced once the restriction is triggered suggesting that the restriction may have a stabilizing effect.
Keywords: Price clustering, orders, short selling
JEL Classification: G10, G14, G18
Suggested Citation: Suggested Citation