Abstract
We study price leadership between an established national exchange (London Stock Exchange) and an entrant high tech market (BATS Chi-X) with inferior order flow. We show intraday variations in price leadership such that LSE narrowly leads price discovery for most of the trading day, while BATS Chi-X overtakes it towards the close. This pattern is consistent with increased informed trading on BATS Chi-X and the effects of institutional trading arrangements on LSE, which confound the price discovery-trading activity link. We also find that prices are inextricably linked across both markets, hence trading fragmentation in Europe has not impaired price discovery.
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