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Rev Fin 1991; 4:389-415
© 1991 the Society for Financial Studies

Article

Stock price clustering and discreteness

L Harris
Department of Finance and Business Economics, School of Business Administration, University of Southern California, Los Angeles, CA 90089-1421, USA

Abstract

Stock prices cluster on round fractions. Clustering increases with price level and volatility. and decreases with capitalization and transaction frequency. Clustering is pervasive. Price clustering will occur if traders use discrete price sets to simplify their negotiations. Exchange regulations require that most stocks be traded on eighths. Clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters, halves, or whole numbers. An econometric model of clustering is derived and estimated. Projections from the result suggest that traders would frequently use odd sixteenths when trading low-price stocks, if exchange regulations permitted trading on sixteenths.


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