Limit Order Clustering and Price Barriers on Financial Markets: Empirical Evidence from Euronext

Abstract

We investigate trade price and limit order price clustering on Euronext, a European stock market which is based on a computerized limit order book. We find evidence of widespread and pervasive trade price and limit order price clustering at increments of five and ten cents. Thus, investors appear to be naturally drawn to certain prominent numbers when placing limit orders. This tendency provides salient points in the order book where latent liquidity can accumulate. We also show that limit order clustering at round numbers generates price barriers. This means that there are price levels (whole integers and halves) for which a given stock spends an inordinate amount of time, thus possibly hampering the market's ability to process information efficiently. Besides, we observe that the next price levels showing the strongest clustering effect are just above (beyond) dimes and nickels for the limit buy (sell) orders. It is consistent with a strategic undercutting/overbidding behavior of some limit order traders who possibly anticipate clustering tendencies on dimes and nickels and try to step-ahead of the quotes and gain price priority.