The Geographic Origin of Order Flow and Price Discovery

37 Pages Posted: 9 Mar 2011 Last revised: 3 Jan 2012

See all articles by Alex Frino

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Robert I. Webb

University of Virginia - McIntire School of Commerce

Hui Zheng

Discipline of Finance, The University of Sydney; Capital Markets CRC Limited

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2011

Abstract

This study exploits a unique dataset to determine the relative contribution to price discovery of order flow originating from geographically dispersed ASX servers. It is found that transactions of traders on the Sydney, Chicago and London servers have a significant impact on price volatility. Trades initiated on the Sydney and Chicago servers incur lower pre-trade transaction costs, pay a lower premium to liquidity providers and have a higher price impact. Traders using the Sydney and Chicago servers contribute significantly to price discovery of the local Australian market. Our results imply that foreign investors can differ in their private information endowments, and collectively contribute to the market efficiency of local markets even when their individual impact is small. Our findings extend the previous literature on home equity bias and may explain the conflicting evidence on the relative informativeness between foreign and local investors.

Keywords: Home bias, International order flow, Price discovery

JEL Classification: G11, G14

Suggested Citation

Frino, Alex and Webb, Robert I. and Zheng, Hui, The Geographic Origin of Order Flow and Price Discovery (February 28, 2011). Available at SSRN: https://ssrn.com/abstract=1781503 or http://dx.doi.org/10.2139/ssrn.1781503

Alex Frino

The University of Sydney - Discipline of Finance ( email )

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Robert I. Webb

University of Virginia - McIntire School of Commerce ( email )

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Hui Zheng (Contact Author)

Discipline of Finance, The University of Sydney ( email )

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Sydney, NSW 2006
Australia
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Capital Markets CRC Limited ( email )

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