Price clustering and the informational efficiency of stock prices

We examine whether stock price clustering on round pricing increments leads to less efficient stock prices. In panel data tests, we find a positive association between price clustering and market inefficiency. To draw stronger causal inferences, we use the 2016 US Securities and Exchange Tick Size Pilot Program, which exogenously imposed price clustering on a group of treatment stocks. A difference-in-differences analysis shows that relative to control stocks, treatment stocks became less efficient during the Pilot period. We also find a reversal effect upon the conclusion of the Pilot. These results suggest that causality flows from price clustering to market inefficiency.