The Interactions between Price Discovery, Liquidity and Algorithmic Trading for US-Canadian Cross-Listed Shares
52 Pages Posted: 3 Dec 2015 Last revised: 15 Feb 2017
Date Written: February 1, 2017
We analyze price discovery dynamics for Canadian companies cross-listed on the NYSE from January 2004 to January 2011. 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 regulatory changes in the U.S. and fragmentation in the Canadian financial markets.
Keywords: Market Microstructure, Price Discovery, Cross-Listings
JEL Classification: C32, G15
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