Clustering of Trade Prices by High‐Frequency and Non–High‐Frequency Trading Firms

• DOI: http://doi.org/10.1111/fire.12042
• Date: 01 May 2014
• Published date: 01 May 2014

The Financial Review 49 (2014) 421–433

Clustering of Trade Prices by

High-Frequency and Non–High-Frequency

Trading Firms

Ryan L. Davis

University of Mississippi

Bonnie F. Van Ness

University of Mississippi

Robert A. Van Ness∗

University of Mississippi

Abstract

We examine clustering of transaction prices in a sample that contains high-frequency

trading firms’ transactions. We separate our sample into four categories: transactions with a

high-frequency trading firm on both sides of the transaction, on only one side of the transaction

(either liquidity provider or liquidity demander), or on neither side of the transaction. We find

that transaction price clustering is less frequent when a high-frequency trading firm is on both

sides of the transaction than when a high-frequency trading firm is on only one side of the

transaction or if a high-frequency trading firm is not involved in the transaction. Further, we

find that transactions where the liquidity providing order, which more likely dictates the price,

is submitted by a high-frequency trading firm cluster less than when the liquidity providing

order is submitted by a non–high-frequency trader. We thus conclude that the tendency of

prices to cluster appears to be driven by a distinctly human bias.

∗Corresponding author: 329 Holman Hall, University of Mississippi, University, MS 38677: Phone:

(662) 915-6940; Fax: (662) 915-7968; E-mail: rvanness@bus.olemiss.edu.

We would like to thank the guest editor (Michael Goldstein) as well as the referee for comments that

helped to improve the paper.

C2014 The Eastern Finance Association 421