International High-Frequency Arbitrage for Cross-Listed Stocks

Abstract

We explore mean-reverting arbitrage activities for international cross-listed stocks and develop a methodology to study the effect of information latency in high-frequency trading. The high-frequency strategy is a hybrid between triangular arbitrage and pairs trading. The strategy can be generalized to multiple cross-listed stocks environments without additional restrictions. Market frictions such as trade costs, inventory control, and arbitrage risks are considered. We test the strategy with cross-listed stocks involving three exchanges in Canada and the United States in 2019. The annual net profit with the limit order strategy is around US$6 million. International latency arbitrage with market orders is not profitable with our data.

Keywords: Latency arbitrage, high-frequency trading, cross-listed stocks, mean-reverting arbitrage, international arbitrage, supervised machine learning

JEL Classification: G02, G10, G11, G14, G15, G22