Market Information and Price Clustering: Evidence from SEC Rule 201

We provide a novel test of information-based theories of price clustering by examining trade, order, and inside quote price clustering during periods when information is removed from the market. We use a natural experiment of short-sale restrictions resulting from Securities and Exchange Commission (SEC) Rule 201 to more effectively determine the impact of information on price clustering. We find evidence of increased price clustering for trades, orders, and inside quotes during short-sale restrictions. Overall, our findings indicate that short-sale restrictions harm the price discovery process and lead to a reduction in market efficiency.

Market Information and Price Clustering: Evidence from SEC Rule 201 Presentation