Exchange Systems and International Comovement of Return and Liquidity

Topic & Objectives

There is substantial evidence of commonality or comovement in the liquidity, order flow, and returns of different assets. Studies have shown that such comovement cannot be completely explained by comovement in fundamental values. We propose to examine the role played by trading technology, specifically the practice of market operators selling their trading technology to other exchanges. Trading systems of dominant market operators have been increasingly employed by other exchanges in recent years. For example, NASDAQ’s INET technology is used in the Nordic and Baltic markets, and Deutsche Börse's Xetra system is used in Ireland, Austria, and Shanghai. We plan to exploit such changes to answer the question of whether the use of a common trading platform leads to an increase in excess comovement. Our study is econometrically well identified because changes in trading systems clearly are not motivated by an anticipation of an increase in comovement. Moreover, exchanges without a change in the trading system can serve as controls.