# How invisible hand adjusts stock prices if company is listed on multiple exchanges, under multiple currencies, and one of the currencies plunges?

I'm an absolute beginner in economics and in the stock exchange and just encountered my first company that was listed in multiple stock exchanges and in multiple currencies. I'm aware of the invisible hand that keeps the prices of one company shares in all of these stock exchanges rationally equal, but I have no idea what is rational f.e. in case when the company is listed in two exchanges and in two currencies like EUR, and DOLLAR and then EUR would suddenly plunge 50%?

I came up with 3 scenarios:

• A: Company stock price in EUR suddenly rises 50% to make it equal with the dollar price that is not changed.
• B: Company stock price in dollars suddenly drops 50% to make it equal with the EUR prices that are not changed.
• C: The truth is probably somewhere in between dollar stock price gets down and EUR price gets up even though I have no idea what would be the ratios here.

I guess the main reason for writing this is that I don't quite understand the currency risk in the above example. If the company would have been listed only in one currency, the situation would be perfectly clear for me, but when it's in multiple currencies and invisible hand forces prices to be equal between various stock exchanges and currencies, then I don't understand what kind of risk I would be taking anymore.

• It's not an invisible hand, it's arbitrage traders. – quid Sep 6 '19 at 22:44
• IOW, there are people (or these days, computer programs) who pay attention to these things, and see that there is a profit to be made from the price difference. Taking the profit quickly adjusts the relative prices. – jamesqf Sep 7 '19 at 0:45
• @quid Arbitrage traders are just skin flakes on the hand's little finger. Or similar. – Russell McMahon Sep 8 '19 at 8:32
• You may be thinking of Depositary Receipts, where shares of a company listed on one exchange are traded on an exchange in another country (and often/mostly another currency). en.wikipedia.org/wiki/Depositary_receipt The answer would be different than for a dual-listed company. In that case the primary listing is clear and the DR would have its price adjusted - but if the company itself was exposed to the currency fluctuation, than the price of the primary listing could change too as it could impact its results. – Erwin Bolwidt Sep 8 '19 at 22:18

## It doesn’t

Dual-listed companies are more complex than you think. They are not a single company listed on two exchanges, they are two separate companies that have claims of the cash flow of the same business under the terms of their equalization agreement. So you can’t buy a share on one exchange and sell that same share on the other.

In theory, because they have equivalent claims on the same cash flow, they should have the same price. However, they are not subject to the same risks (such as currency risk, governance structures, legal contracts, liquidity, and taxation) or market forces (such as investor demand - BHP-Billiton is listed on the London Stock Exchange and the Australian Securities Exchange, the former has approximately three times the market cap of the latter). Different risk profiles will translate into different prices.

Notwithstanding, even allowing for this, dual listed companies can have unaccountable price disparities and these can persist for a very long time - we’re talking months and years here. This would seem to present a golden arbitrage opportunity. However, because the shares are not fungible the arbitrage position must be maintained until the prices converge, they can’t be forced by the arbitrager. This is risky given that this can take months or years and the shares could continue to diverge in value in the meantime.

• Not completely true. I can purchase shares of Canadian companies from the Toronto Stock Exchange in CAD and then turn around and sell them on the NYSE in USD. (It can even be a cheaper way to convert currency than using the broker, who marks up the exchange rates.) The stocks I could transact in this way are exactly the same stock, exactly the same company -- just on different exchanges, in different countries, and in different currencies. e.g. BCE, CNR/CNI, ENB, MX/MEOH, RY... Sometimes the symbol matches, sometimes it doesn't. The list goes on. – Chris W. Rea Sep 7 '19 at 1:25
• Quite a lot of ASX-listed stocks trade on the TSX, too. Precious metals companies in particular, it seems. See tmxmoney.com/en/research/interlisted.html – Chris W. Rea Sep 7 '19 at 1:47
• @ChrisW.Rea - Note there's a difference between cross-listed securities and dual-listed companies - are you describing dual-listed companies? money.stackexchange.com/questions/7554/… has more info on the differences. – Egret Sep 7 '19 at 18:34
• @Egret Indeed there is a difference. I'm describing interlisted companies. I don't think the OP was specifically asking about dual-listed, but this answer is focusing on that. My comment was to draw attention to other possibilities where arbitrage is more effective. – Chris W. Rea Sep 7 '19 at 19:44
• @ChrisW.Rea - Thanks, got it. But I guess I'm not sure of the terminology - interlisted, cross-listed, and dual listed companies - is that something I should spin off a separate question for? – Egret Sep 8 '19 at 22:11

If the shares are fungible between the exchanges, you are correct that the prices will be kept nearly equivalent by arbitrage. The missing piece to understand how the price reacts to currency fluctuations is the fundamentals of the company. This applies regardless of whether the shares are traded in a single currency or multiple currencies. It's a matter of what currencies the company's revenues and costs are denominated in, whether the company uses (or competes with) imported products, how the currency move will affect economic conditions, etc.

Once an estimate of the fundamental effect on company value is made in one currency, the effect on value in any other currency follows from a risk-free arbitrage condition. But that underlying fundamental effect can't be determined by arbitrage alone, only by the judgment of investors.

A limiting case in which we can pin things down is a company doing business in major currencies in major economies, whose shares also happen to be traded in a minor currency that has no strong relevance to its business (picture US stocks being traded in grubnick on the Elbonian exchange). If the minor currency surges or crashes but this doesn't significantly affect major economies, then the local share price will move inversely because its value in the major currencies should stay the same. This is a trivial case of the fundamental analysis.

The key question is what the currency change does to the fundamental value of the company.

If the company is an American widget company AmCo with a primarily American customer base and a primarily American supply chain, then it should be broadly insulated against the price of Euros. (At least, until you consider irritating things like competitors. There's always room for more variables.) This should broadly hold steady with the dollar price, and the Euro price be doubled to catch up.

Meanwhile if the company is an international widget company with an American supply chain but a primarily European customer base, it's going to have a hard time. It'll be taking payment in Euros, converting them to half as many dollars, and scratching its head about how to stretch across the gap. That's the sort of shock which is hard for any company to recover from, and the stock price may fall by far more than 50% as investors realise the company may have to fold completely.

• No it won't. If the euro becomes cheaper, the European competitors will start to seriously compete with AmCo. Thus, the price of AmCo stock crashes. Only local services that cannot be exported across country borders are isolated against currency fluctuations. Change AmCo supplying widgets to AmServiceCo supplying local services, and then your argument about insulation against the price of Euros becomes valid. – juhist Sep 8 '19 at 11:25
• As I said, there are always additional variables you could consider, including competition. Evaluating the effect on competition also runs into a bunch of it depends on questions, like the cause of the crash. Euro fell because the EU intentionally started a QE program: very possibly competitors flourish. Euro crashed because France has a civil war: competition will probably not be so strengthened. – Josiah Sep 8 '19 at 16:01

"How" the hand does anything is easily answered by considering what the hand "really is".
"The invisible hand" is a metaphor for the concept that

• Where there is a way that can be found to make money by undercutting what someone else is doing then someone (or entity) will do it.

• or - When an opportunity exists to make a profit by reducing ones costs compared to another's then 'No stone will be left unturned'.

In the case of share trading much of the next paragraph is not directly relevant, but the principles form the fundamentals of the "engine" that drives the hand. Note that the various mentions of illegality or impropriety do not imply the hand is itself immoral - it doesn't know or care about ANYTHING that is not assigned a cost or return to it.

Reducing costs or maximising profit competitively may involve lowering prices (more volume, competitors lose volume, ...), and/or lowering cost of implementation (materials or labour)(greater profit per volume).
It can also involve increasing prices if this can achieve an increase in overall return for effort - this may involve illegal or non-regulatory-compliant actions to ensure the prices are accepted (bribes, lobbying, protection, ...).
Lowering cost may involve greater skill, special knowledge , or illegal actions or outright theft. The hand is amoral (nb: not immoral) and without conscience or regard for any factor which is not assigned a real value when it acts.

In the specific case you cite this translates to "any way that works". Dale_M explains that it cannot be done 'in some cases', and others explain why this is incorrect 'in some cases'. The hand 'examines the cases' and implements the doable ones. It also tries to implement various apparent but undoable ones. This may destroy the would be implementer - the hand and the end result are agnostic to failures. Some individuals may be put off by the difficulties and consequences experienced by some or many or most. The hand "does not care" - if some succeed then that's what the hand does. If all fail in a given case the result is simply the best that can be achieved by some mix of the most adventuresome, ingenious, unscrupulous, lucky or persistent.