The interactions between price discovery, liquidity and algorithmic trading for US-Canadian cross-listed shares

B Frijns; I Indriawan; A Tourani-Rad

doi:10.1016/j.irfa.2018.01.005

The interactions between price discovery, liquidity and algorithmic trading for US-Canadian cross-listed shares

B Frijns, I Indriawan^*, A Tourani-Rad

^*Corresponding author for this work

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

We analyze price discovery dynamics for Canadian companies cross-listed on the NYSE from January 2004 to August 2017. We employ a structural vector autoregression to assess the interactions between price discovery, liquidity and algorithmic trading activity. We observe that over time, the U.S. market is gaining dominance in terms of price discovery. Improvements in liquidity increase a market's contribution to price discovery, and vice versa. We find that algorithmic trading activity is negatively related to price discovery, indicating negative externalities of high-frequency trading. These results are robust to fragmentation in the Canadian financial markets as well as regulatory changes in both the U.S. and Canada.

Original language	English
Pages (from-to)	136-152
Number of pages	17
Journal	International Review of Financial Analysis
Volume	56
DOIs	https://doi.org/10.1016/j.irfa.2018.01.005
Publication status	Published - Mar 2018
Externally published	Yes

Keywords

Cross-listings
Market microstructure
Price discovery

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10.1016/j.irfa.2018.01.005

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title = "The interactions between price discovery, liquidity and algorithmic trading for US-Canadian cross-listed shares",

abstract = "We analyze price discovery dynamics for Canadian companies cross-listed on the NYSE from January 2004 to August 2017. We employ a structural vector autoregression to assess the interactions between price discovery, liquidity and algorithmic trading activity. We observe that over time, the U.S. market is gaining dominance in terms of price discovery. Improvements in liquidity increase a market's contribution to price discovery, and vice versa. We find that algorithmic trading activity is negatively related to price discovery, indicating negative externalities of high-frequency trading. These results are robust to fragmentation in the Canadian financial markets as well as regulatory changes in both the U.S. and Canada.",

keywords = "Cross-listings, Market microstructure, Price discovery",

author = "B Frijns and I Indriawan and A Tourani-Rad",

year = "2018",

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doi = "10.1016/j.irfa.2018.01.005",

language = "English",

volume = "56",

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journal = "International Review of Financial Analysis",

issn = "1057-5219",

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T1 - The interactions between price discovery, liquidity and algorithmic trading for US-Canadian cross-listed shares

AU - Frijns, B

AU - Indriawan, I

AU - Tourani-Rad, A

PY - 2018/3

Y1 - 2018/3

N2 - We analyze price discovery dynamics for Canadian companies cross-listed on the NYSE from January 2004 to August 2017. We employ a structural vector autoregression to assess the interactions between price discovery, liquidity and algorithmic trading activity. We observe that over time, the U.S. market is gaining dominance in terms of price discovery. Improvements in liquidity increase a market's contribution to price discovery, and vice versa. We find that algorithmic trading activity is negatively related to price discovery, indicating negative externalities of high-frequency trading. These results are robust to fragmentation in the Canadian financial markets as well as regulatory changes in both the U.S. and Canada.

AB - We analyze price discovery dynamics for Canadian companies cross-listed on the NYSE from January 2004 to August 2017. We employ a structural vector autoregression to assess the interactions between price discovery, liquidity and algorithmic trading activity. We observe that over time, the U.S. market is gaining dominance in terms of price discovery. Improvements in liquidity increase a market's contribution to price discovery, and vice versa. We find that algorithmic trading activity is negatively related to price discovery, indicating negative externalities of high-frequency trading. These results are robust to fragmentation in the Canadian financial markets as well as regulatory changes in both the U.S. and Canada.

KW - Cross-listings

KW - Market microstructure

KW - Price discovery

U2 - 10.1016/j.irfa.2018.01.005

DO - 10.1016/j.irfa.2018.01.005

M3 - Article

SN - 1057-5219

VL - 56

SP - 136

EP - 152

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

ER -

The interactions between price discovery, liquidity and algorithmic trading for US-Canadian cross-listed shares

Abstract

Keywords

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