Splitting Orders in Overlapping Markets: A Study of Cross-Listed Stocks

Abstract

Fragmented trading is widespread. Chowdhry and Nanda (1991) show that some traders benefit by splitting orders across markets at the cost of small liquidity traders who, for exogenous reasons, only trade locally. We extend their model to analyze British and Dutch ADRs, which in addition to a one or two hour overlap of NYSE and home market trading also feature a nonoverlap. We predict that, in the presence of sufficient small liquidity trading, traders concentrate their trades in the overlap and split orders. We document considerable empirical support. In the cross-section, we find evidence of order-splitting only for ADRs that exhibit most NYSE small liquidity trading. This evidence is (i) increased volatility, increased volume, and (weakly) higher liquidity supply in the overlap and (ii) positive correlation in order imbalance across markets. We further document an average 10% Hasbrouck information share for the common component in order imbalance.

Keywords: cross-listing, trading, fragmentation, high-frequency, nyse, order-splitting, multi-market trading, fragmented

JEL Classification: G15, G10, G18