Can Daily Closing Prices Predict Future Movements? The Role of Limit Order Clustering

Abstract

Stocks that close just above a round number (e.g., $6.10) tend to rise and outperform those that close just below (e.g., $5.90) by 24.6 basis points the next day and 46.1 basis points over the following week. I attribute this predictability to limit order clustering: concentrated buy orders at round prices support stocks above the threshold, whereas concentrated sell orders restrain those below. The effect is robust to various firm characteristics, appears throughout intraday half‑hour intervals, and replicates in 18 international equity markets. Exogenous price shifts around stock splits and dividend payments provide causal evidence. Consistent with a retail‑trading channel, the spread is larger in stocks with heavy retail activity, and trades executed exactly at round numbers are smaller. Order clustering also slows the incorporation of earnings‑announcement news and contributes to short‑term return reversal. Overall, these findings reveal how a high‑frequency microstructure friction can shape return dynamics over much longer horizons.

Keywords: Limit Order Clustering, Return Predictability, Retail Investors, Round Numbers

JEL Classification: G12, G14