The Geographic Origin of Order Flow and Price Discovery

37 Pages Posted: 2 Jan 2012  

Alex Frino

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

Robert I. Webb

University of Virginia

Hui Zheng

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 2, 2012

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 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

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

Alex Frino

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Robert I. Webb

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

Hui Zheng (Contact Author)

Discipline of Finance, The University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 3915 (Phone)
+61 2 9351 6461 (Fax)

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

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