Splitting orders in overlapping markets: A study of cross-listed stocks

Fragmented trading is widespread. Chowdhry and Nanda [Chowdhry, B., Nanda, V., 1991. Multimarket trading and market liquidity. Rev. Finan. Stud. 4, 483-511] show that some traders benefit by splitting orders across markets at the cost of small liquidity traders who, for exogenous reasons, only trade locally. We extend their model to analyze British and Dutch stocks with ADRs, which trade on both sides of the Atlantic for one or two hours each day. We predict that, in the presence of sufficient small liquidity trading, traders concentrate their trades in the overlapping period and split orders across markets. We document considerable empirical support. In the cross-section, we find order-splitting only for ADRs with most NYSE small liquidity trading. The evidence is (i) increased volatility, increased volume, and (weakly) higher liquidity supply in the overlap and (ii) positive correlation in order imbalance across markets. We further find that the common component in order imbalance has long-term price impact, which supports the notion that these order-splitters are informed traders.