Buy-Sell Imbalances Around Round Numbers and High-Frequency Trading

61 Pages Posted: 25 Feb 2019 Last revised: 29 Sep 2019

See all articles by Albert J. Lee

Albert J. Lee

Truman State University - Department of Business Administration

Date Written: February 7, 2019

Abstract

I show that the growth of high-frequency trading, due to its heavy reliance on computer algorithms, can be associated with a reduction of human errors and financial anomalies in the market. Trades in which a non-high-frequency trader is the liquidity demander exhibit abnormally high buy (sell) pressure when prices are immediately below (above) a round number due to psychological effects, while the pattern is completely reversed when a high-frequency trader is the liquidity demander. As a result, the overall sample does not exhibit such imbalances. Furthermore, high-frequency traders earn higher returns when trading around round number prices.

Keywords: high-frequency traders; algorithmic trading; behavioral finance; order imbalance; financial anomaly

JEL Classification: G02, G14, G23

Suggested Citation

Lee, Albert, Buy-Sell Imbalances Around Round Numbers and High-Frequency Trading (February 7, 2019). Available at SSRN: https://ssrn.com/abstract=3331198 or http://dx.doi.org/10.2139/ssrn.3331198

Albert Lee (Contact Author)

Truman State University - Department of Business Administration ( email )

100 E. Normal Street
Kirksville, MO
United States

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