Interconnected financial markets represented by flags connected with energy pathways.

Unlocking Market Efficiency: How Cross-Border Trading Can Benefit You

Elliot Brynn in Business & Economy December 2025 • 4 min read.

"A New Model Reveals the Intricacies of International Markets and the Impact of Limited Transmission Capacities"

In today's interconnected world, financial markets are no longer confined by national borders. Cross-border trading, where participants from different countries engage in transactions, has become increasingly prevalent, offering opportunities for diversification and potentially higher returns. However, the complexities of these international markets, particularly when faced with limitations such as restricted transmission capacities, require a deeper understanding.

A recent research paper introduces a novel cross-border market model that sheds light on these intricate dynamics. By examining the continuous trading mechanisms between two countries, the model reveals how limited transmission capacities—the ability to execute cross-border trades—influence market behavior and price formation. This model helps to explain scenarios when cross-border trading is active or inactive and the resulting market actions when trading can be limited.

This article breaks down the complexities of the cross-border model and shows how it can lead to a more stable and efficient market. We will explore how this research could impact investment strategies, electricity markets, and global financial interactions.

Decoding the Cross-Border Market Model: A Closer Look

Interconnected financial markets represented by flags connected with energy pathways.

The cross-border market model considers a continuous trading mechanism between two countries. Key to this model is the concept of 'transmission capacities,' which dictates the volume of transactions possible between market participants in different countries. The model operates under two primary regimes:

Understanding these regimes is crucial, since the model factors in domestic and international trade at high arrival rates. It examines price fluctuation and trade volume at various levels to deduce market tendencies. Understanding transmission capacities, domestic market activity, and market matching is key to understanding intraday market action.

Active Regime: Cross-border trading is permitted, allowing market participants from one country to directly trade with those in another.
Inactive Regime: Cross-border trading is prohibited. Market participants can only execute trades with others within their own country.

Starting with the limit order books (LOBs) in two national markets, the researchers derive a high-frequency approximation of the microscopic model, operating under the assumption that the size of an individual order converges to zero as the order arrival rate approaches infinity. When transmission capacities are available, the dynamics follow these rules:

Implications for Investors and Policymakers

As cross-border trading continues to evolve, understanding the dynamics of these markets becomes increasingly important. By incorporating the complexities of limited transmission capacities, this model offers a more realistic representation of international financial interactions. For investors and policymakers alike, these insights can inform better strategies and decisions, promoting greater market stability and efficiency.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2207.01939,

Title: A Cross-Border Market Model With Limited Transmission Capacities

Subject: math.pr q-fin.mf

Authors: Cassandra Milbradt, Dörte Kreher

Published: 05-07-2022

Everything You Need To Know

What are 'transmission capacities' in the context of cross-border trading, and why are they important?

In cross-border trading, 'transmission capacities' refer to the volume of transactions that can be executed between market participants in different countries. These capacities are crucial because they directly influence market behavior and price formation. Limited transmission capacities can restrict the flow of trades, potentially leading to an 'inactive regime' where cross-border trading is prohibited, impacting the ability of investors to diversify and potentially achieve higher returns. Understanding these capacities is key to grasping intraday market action and predicting market tendencies.

Can you explain the difference between the 'active regime' and the 'inactive regime' in the cross-border market model?

The cross-border market model operates under two primary regimes. The 'active regime' is when cross-border trading is permitted, allowing market participants from one country to directly trade with those in another. In contrast, the 'inactive regime' occurs when cross-border trading is prohibited, restricting market participants to only execute trades within their own country. The shift between these regimes depends on factors like the availability of 'transmission capacities'.

How does the cross-border market model account for high-frequency trading dynamics?

The cross-border market model incorporates high-frequency trading dynamics by deriving a high-frequency approximation of the microscopic model from limit order books (LOBs) in two national markets. This approximation operates under the assumption that the size of an individual order converges to zero as the order arrival rate approaches infinity. By considering domestic and international trade at high arrival rates, the model examines price fluctuation and trade volume at various levels to deduce market tendencies, giving insights into intraday market action.

What are the implications of this cross-border market model for investors and policymakers?

For investors, understanding the dynamics of cross-border markets, particularly the impact of limited 'transmission capacities', can inform better investment strategies. The model provides a more realistic representation of international financial interactions, allowing investors to navigate the complexities of these markets more effectively. For policymakers, these insights can lead to better decisions aimed at promoting greater market stability and efficiency. For example, policies that improve 'transmission capacities' might encourage more cross-border trading and market integration. However, the model does not explicitly address policy recommendations, so further research is needed to translate these insights into concrete policy actions.

How might limited 'transmission capacities' between countries affect the overall efficiency of global financial markets?

Limited 'transmission capacities' can significantly hinder the efficiency of global financial markets. When cross-border trading is restricted, the price discovery process may be impaired, leading to price discrepancies between markets. This can reduce opportunities for arbitrage and diversification, potentially increasing risk and reducing returns for investors. Furthermore, constrained 'transmission capacities' can impede the flow of capital across borders, hindering economic growth and development. The cross-border market model helps to quantify these effects and identify strategies to mitigate them, such as improving infrastructure or harmonizing regulations to facilitate smoother cross-border transactions. However, the model does not address regulatory aspects; therefore further research is needed.