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

Verousis, Thanos and ap Gwilym, Owain (2014) 'The implications of a price anchoring effect at the upstairs market of the London Stock Exchange.' International Review of Financial Analysis, 32. 37 - 46. ISSN 1057-5219

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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
Uncontrolled Keywords: Informed trading, Microstructure, Upstairs market, LSE, High-frequency data
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 14 Mar 2019 19:57
Last Modified: 14 Mar 2019 20:15
URI: http://repository.essex.ac.uk/id/eprint/24182

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