ap Gwilym, Owain, Clare, Andrew and Thomas, Stephen
Extreme price clustering in the London equity endex futures and options market.
Journal of Banking & Finance, 22, (9), . (doi:10.1016/S0378-4266(98)00054-5).
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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.
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