What Characterizes Commonality on European NYSE Euronext Markets?
34 Pages Posted: 8 May 2011 Last revised: 11 May 2011
Date Written: February 15, 2011
Using a rich dataset of orders and trades for a sample of stocks listed on the four European markets of NYSE Euronext, we apply principal component analysis and provide evidence on the existence and magnitude of commonality in returns, order flow and liquidity. We show that commonality in order flow mainly comes from foreign market members acting for their own account. Proprietary trading is a major driver in trade imbalance and return commonality. Next, we provide evidence on commonality in hidden liquidity. In contrast to commonality in visible depth that is the strongest for large firms, comovements in hidden depth seem to be stronger for small caps. We also show that commonality in returns, order flow and liquidity is not constant throughout the day. The opening of US markets is a key moment where commonality often reaches its maximum level.
Keywords: Commonality, Proprietary Trading, Hidden Liquidity
JEL Classification: G14, G10
Suggested Citation: Suggested Citation