Where does price discovery occur for stocks traded in multiple markets? Evidence from Hong Kong and London

Using a sample of Hong Kong-listed stocks that are also traded on the London Stock Exchange, we document the following results: first, London market makers use Hong Kong's closing prices as the benchmark for setting the opening prices in London. Second, trading in the London market plays only a limited role in price discovery in the Hong Kong market. Third, the stock returns from London trading are closely correlated with those of the Hong Kong market. The above findings are consistent with the explanation that London trading is predominantly liquidity-driven but not information-driven.