37 Pages Posted: 2 Jan 2012
Date Written: January 2, 2012
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 the 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 on 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 over whether foreign or local investors are better informed.
Keywords: home bias, international order flow, price discovery
JEL Classification: G14, G15
Suggested Citation: Suggested Citation
Frino, Alex and Webb, Robert I. and Zheng, Hui, The Geographic Origin of Order Flow and Price Discovery (January 2, 2012). Available at SSRN: https://ssrn.com/abstract=1978319 or http://dx.doi.org/10.2139/ssrn.1978319
By Andrew Lo