The implications of a price anchoring effect at the upstairs market of the London Stock Exchange
Verousis, Thanos Ap Gwilym, Owain
Verousis, Thanos
Ap Gwilym, Owain
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Publication Type
Journal article with impact factor
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Supervisor
Publication Year
2014
Journal
International Review of Financial Analysis
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Publication Volume
32
Publication Issue
March
Publication Begin page
37
Publication End page
46
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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.
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Keywords
Informed Trading, Microstructure, Upstairs Market, LSE, High-Frequency Data