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The implications of a price anchoring effect at the upstairs market of the London Stock Exchange

Verousis, T. and Ap Gwilym, O. (2013) The implications of a price anchoring effect at the upstairs market of the London Stock Exchange. International Review of Financial Analysis, 32. pp. 37-46. DOI: 10.1016/j.irfa.2013.12.001

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Abstract

This paper studies the upstairs market of the Stock Exchange Trading System (SETS) of the London Stock Exchange (LSE). We hypothesise that the implicit interaction between the upstairs and the downstairs markets at the LSE alters the pricing mechanism at the upstairs market. We show that market makers employ �cluster undercutting� practices in the upstairs market, which are based on a notional minimum price increment and resemble an anchoring-and-adjustment effect. In particular, we report that liquidity providers consistently buy just below the implicit minimum price increment and consistently sell just above it. This finding is strongly related to stock-price momentum and periods of increased trade intensity. Overall, this effect has only a weak connection to differences in informed trading and is mostly related to the notional price barriers and resistance levels introduced by the minimum tick size of the order book.

Item Type: Article
Subjects: Research Publications
Departments: College of Business, Law, Education and Social Sciences > Bangor Business School
Date Deposited: 09 Dec 2014 16:36
Last Modified: 25 Sep 2015 02:33
ISSN: 1057-5219
URI: http://e.bangor.ac.uk/id/eprint/550
Identification Number: DOI: 10.1016/j.irfa.2013.12.001
Publisher: Elsevier
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