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X. Zhang: Limit Order Clustering and Stock Price Movements

February 28, 2025

Individual stocks with daily closing price just above round numbers (e.g., $6.1) outperform stocks just below (e.g, $5.9) by 24.6 bps over next day, which translates to an annualized return of 61%! This return pattern is extremely robust to various stock characteristics and international samples. We provide evidence to link these predictable price movements to limit order clustering: prices just above (below) round numbers are supported (resisted) by a clustering of limit orders at these psychologically significant levels. This finding reveals a profound impact of order clustering (mostly by retail investors) on random price movement and market efficiency.

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