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Abstract

A substantial number of last reported transactions for stocks trading on the New York Stock Exchange occur inside the quoted closing bid-ask spread. The tendency to close inside the spread results in price change magnitudes much smaller than those predicted from binomial models. Moreover, although the change magnitude is biased by the underlying trend of the market, the distribution of next day price change relatives is largely unaffected. The result is a systematic regularity between the location of today's close and tomorrow's close relative to the bid-ask spread.