NYSE affects on Global markets

This overview is based on the paper entitled “NYSE closure and global equity trading: The case of cross-listed stocks”, authored by Olga Dodd and Bart Frijns, and is published in International Review of Financial Analysis

The New York stock exchange (NYSE) is the largest equity market and a major centre where stock-specific information is generated and priced. Listing on the NYSE is also popular with international companies. On March 31, 2019, there were 507 non-US companies from 46 countries listed on the NYSE. For these cross-listed companies trading in two markets, the US and the home markets, is beneficial because it increases intermarket competition for order flow, investor base, and more information. For investors, cross-listed stocks provide a cost-effective way to invest in foreign stocks and cross-market arbitrage opportunities.

It is accepted that there are benefits from trading in two markets, however, it is less clear what happens to trading of cross-listed stocks when the NYSE is closed, let’s say, on public holidays or due to natural hazards, such as hurricane Sandy in October 2012. When the NYSE is closed, trading of cross-listed stocks could migrate to the home market. In this case, the home market benefits from liquidity and information efficiency of stock prices. However, liquidity in the home market could decrease if trading of cross-listed stocks in the home market is dependent on the US market. In addition, the US equity traders are active in international markets as arbitragers, competing for order flow in international markets. Therefore, closure of the US market would negatively impact global liquidity because it disables multi-market arbitrageurs from trading on mispricing.

In this paper, we examine what happens to global liquidity and liquidity of cross-listed stocks on the day when the NYSE is closed. So, we find a decrease in stock liquidity and information efficiency of stock prices around the globe on the days when the US market is closed, confirming that the US market is an important source of information and order flow competition for international equity markets. For cross-listed stocks, we find an additional large drop in trading and information efficiency. Therefore, cross-listing on the NYSE opens a new information channel for cross-listed stocks and a new source of intermarket competition for order flow, making cross-listed stocks dependent on the US market.

Our findings have important implications for companies, investors and traders. For companies, the findings provide evidence on a decrease in stock liquidity due to US specific events, such a US public holiday. For investors and traders, the results show that on days when the US market is closed trading in international markets is more difficult and costly.

• Video - author interview
  The editor of International Review of Financial Analysis, Brian Lucey, interviews Dr Olga Dodd