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

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 market at the LSE alters the pricing mechanism at the upstairs market. We show that in the upstairs market, market makers resort to "cluster undercutting" practices on the basis of a notional minimum price increment that resembles 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.

Gold and oil prices: abnormal returns, momentum and contrarian effects

“…Numerous studies have been carried out to establish the empirical relevance of the EMH by testing for the existence of exploitable market anomalies. These could arise for a variety of reasons, such as the irrational behaviour of market participants (Barber and Odean 2001), new information arrivals such as earnings announcements (Rees and Thomas 2008), divergence between analysts' expectations and actual data (Doukas et al 2006), insiders' purchases and sales (Inci et al 2010), behavioural biases (Verousis and Gwilym 2013;Chen 2017), technical analysis and the execution of stop-losses (Osler 2002), etc.…”

The market dynamics of socially embedded trading

“…First, prices in the upstairs market are bound by bid and ask prices in the downstairs market (e.g. Beunza and Millo, 2013; Bikunle and Armitage, 2015; Booth et al, 2002; Verousis and Gwilym, 2014). But the folding goes both ways as trades on the upstairs market are electronically posted and can inform trades on the downstairs market.…”