Price Clustering Asymmetries in Limit Order Flows
36 Pages Posted: 3 Jun 2015 Last revised: 5 Nov 2015
Date Written: November 4, 2015
We explore the relation between limit order price clustering and price efficiency. We find that executed sell limit orders cluster more frequently on round increments than buy limit orders and that this asymmetry in clustering is consistent with the well documented asymmetry in price response to marketable orders. Additionally, we find that the degree of clustering is positively related to volatility and that asymmetry in clustering depends on whether stock prices are rising or falling - sell limit orders cluster more frequently as prices are rising, while buy limit order cluster more as prices are declining. Our results indicate that predictable patterns in limit order pricing contribute to short-run deviations from price efficiency.
Keywords: Price clustering, Limit orders, Information asymmetry, Cognitive processing
JEL Classification: C23, D4, D81, D84, G12, G14
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