ABSTRACT
We investigate the relation between quote activity and the precision with which prices are quoted. Where prior literature finds that the tendency of price-endings to cluster on rounder fractions declines monotonically with quote activity, we show that the decline is limited to an initial range of quote activity. Once a very high level of quote activity is reached, the use of rounder quotes increases with quote activity. Also contrary to the conventional view is our finding that round quotes are used more frequently in the more active of two market segments where equivalent assets are traded. We attribute our results to two opposing influences of activity on price clustering, the price resolution and negotiation effects, that reflect the cognitive limitations of humans when dealing with uncertain values.
Acknowledgement
We thank Ivo Jansen for helpful comments and suggestions. The authors acknowledge partial financial support from the David Whitcomb Center for Research in Financial Services of Rutgers University.
Disclosure statement
No potential conflict of interest was reported by the authors.