Security design,market risk and round quotes in the treasury bond market

Prior literature finds that the tendency of price-endings to cluster on rounder fractions increases with price volatility. We estimate the separate influences and relative importance of the determinants of price volatility, security design and market risks. Our data is from a market setting that is ideal for isolating and studying the relations of interest. Results for both quote and trade prices indicate that the tendency to use round price-endings increases with both a security’s inherent risk, attributable to security design, and variation over time in market risks. Security design influences clustering more than market risks, but market risks are influential in determining clustering once security design is fixed. The estimated effects are strongest in the on-the-run market segment where liquidity facilitates the aggregation of information into price.