A surreal image illustrating how trading in a central, highly liquid asset impacts other connected financial symbols through a web of interconnectedness.

Decoding Cross-Market Impact: When One Trade Rocks Multiple Markets

Lena Kashyap in Business & Economy December 2025 • 4 min read.

"Unlock the secrets of how trading in one asset ripples across the market, influencing prices and investment strategies in unexpected ways."

In the intricate dance of global finance, every action has a reaction. Standard economic theory suggests asset prices reflect publicly available information, but the reality is far more complex. Price formation is an active process, influenced by the trades of market participants, a phenomenon known as price impact.

One fascinating aspect of price impact is its ability to cross markets. When trading pressure from one asset influences the price of another, it's called cross-impact. While this concept has been explored, what remains unclear is what makes cross-impact significant enough to sway prices, and how quickly this influence spreads.

A new study digs deep into this cross-market dynamic, analyzing five years of tick-by-tick data from 500 U.S.-listed assets. Researchers have uncovered key factors that determine when cross-impact matters, shedding light on how liquidity, trading frequency, and asset correlations shape price movements across markets. Prepare to rethink how you understand market interconnectedness.

What Determines Cross-Market Impact? Unpacking the Key Factors

A surreal image illustrating how trading in a central, highly liquid asset impacts other connected financial symbols through a web of interconnectedness.

The study's findings reveal that cross-impact isn't a universal force. It depends on a confluence of factors, including liquidity, trading frequency, and correlations between assets. Let's break down these elements:

Liquidity: Liquidity plays a starring role. According to the study, price formation primarily occurs within highly liquid assets. These assets then act as a sort of price discovery hub, influencing the prices of less liquid, but correlated, assets. It’s like the tide lifting all boats, but only after it’s already substantially raised the water level for the big ships.

Trading Frequency: The speed at which cross-impact occurs is limited by the minimum trading frequency of the affected assets. Think of it like a delayed reaction; the impact can only spread as quickly as the less active asset responds to new information.
Asset Correlation: Cross-impact is most pronounced between assets that are highly correlated. When assets move in tandem, trading pressure on one is more likely to spill over and affect the price of the other.

These factors paint a picture of how information and trading pressure flow through the market. Highly liquid, frequently traded assets respond quickly to new information. These assets then influence correlated, less liquid assets, with the speed of this influence limited by the trading activity of the less liquid asset.

Re-thinking Financial Economics: A New Look at Interest Rate Dynamics

The study's exploration of interest rate markets offers a powerful example of cross-market impact in action. The research suggests the 10-year bond future acts as a primary liquidity reservoir, driving price movements in other bonds and futures contracts along the interest rate curve. This challenges a core tenet of financial economics, which assumes long-term rates reflect investor expectations of future short-term rates. Instead, the study suggests trading activity in highly liquid instruments can directly influence prices in less liquid ones, regardless of investor sentiment.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2305.16915,

Title: When Is Cross Impact Relevant?

Subject: q-fin.tr cond-mat.stat-mech econ.em

Authors: Victor Le Coz, Iacopo Mastromatteo, Damien Challet, Michael Benzaquen

Published: 26-05-2023

Everything You Need To Know

What is cross-market impact in the context of finance?

Cross-market impact refers to the phenomenon where trading pressure or price movements in one asset influences the price of another asset in a different market. It highlights the interconnectedness of financial markets, showing how actions in one area can have ripple effects elsewhere. This is particularly evident when considering the relationship between highly liquid assets and less liquid, but correlated, assets, where price discovery in the former can drive price movements in the latter.

What factors determine the significance of cross-market impact?

The significance of cross-market impact is determined by a combination of factors. Liquidity plays a starring role, with price formation primarily occurring in highly liquid assets, which then influence less liquid, but correlated, assets. Trading frequency also matters; the impact spreads as quickly as the less active asset responds to new information. Finally, asset correlation is key; cross-impact is most pronounced between assets that move in tandem. The degree of influence is determined by how these factors interact in the market.

How does liquidity affect cross-market impact?

Liquidity is a primary driver of cross-market impact. The study indicates that price formation mainly happens in highly liquid assets. These assets then serve as price discovery hubs, influencing the prices of less liquid, but correlated, assets. This means that trading activity and price movements in liquid assets can significantly affect the valuations of other, less actively traded instruments, demonstrating how liquidity acts as a conduit for price influence across different markets.

How does trading frequency influence the spread of cross-market impact?

Trading frequency limits the speed at which cross-market impact occurs. The impact can only spread as quickly as the less active asset responds to new information. This suggests that assets with lower trading frequencies will experience a delayed reaction to price movements in other markets, while assets with higher trading frequencies will react more quickly. The speed of information flow, therefore, is constrained by the trading activity of the affected assets.

How does the 10-year bond future influence interest rate dynamics according to the study?

The study suggests that the 10-year bond future acts as a primary liquidity reservoir, driving price movements in other bonds and futures contracts along the interest rate curve. This challenges the traditional assumption that long-term rates reflect investor expectations of future short-term rates. Instead, the study indicates that trading activity in the highly liquid 10-year bond future can directly influence prices in less liquid instruments, regardless of investor sentiment, highlighting a direct cross-market impact within the interest rate markets.