Abstract
This paper analyzes the relative trading activity of securities cross-listed on two highly integrated international stock exchanges. We find that traders choose an exchange on the basis of superior market quality, as measured by better quoted prices, greater depth at the market in its limit order book and better price continuity. As well, clientele effects influence trade location. From the perspective of a US investor, the price impacts of the total sample of trades for these securities, are statistically significantly lower on the New York Stock Exchange than on the Toronto Stock Exchange; but are not economically different. The results are consistent with the order splitting hypothesis and the co-existence of multiple markets.
Highlights
The purpose of this paper is to examine theoretical models of market fragmentation through the analysis of securities cross-listed on two highly integrated international markets
The paper examines trading activity and costs of securities cross-listed on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSE). (Note 1) The high integration of these markets is shown by the fact that arbitrage opportunities are relatively small, infrequent and short-lived
This paper measures the impact of market quality and clientele effects on trading activity and trade execution costs of 65 stocks cross-listed and actively traded on both the NYSE and the TSE
Summary
The purpose of this paper is to examine theoretical models of market fragmentation through the analysis of securities cross-listed on two highly integrated international markets. We address the question of whether investors choose to trade in the market with the higher market quality as measured by better quoted prices, greater depth at the market in its limit order book and better price continuity, or whether there are other factors that influence their choice of trading venue The answer to this question is relevant to the issue of how security exchanges compete with each other for trading volume and whether trading will inevitably gravitate to a single global exchange. (Note 3) If multiple markets are to coexist, two testable implications are: on average, the transaction costs on the exchanges are equal and trading activity will be concentrated on the venue with the highest market quality. To test these hypotheses, we need to measure both realized and potential transaction costs.
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