ADRs and Algorithmic Trading Risks: The Infosys Case Study in Artificial Volatility

The American Depositary Receipt (ADR) market, a critical bridge for global investors seeking exposure to foreign equities, has long been susceptible to structural vulnerabilities. The December 2025 Infosys ADR incident-a case of extreme artificial volatility-exposes how technical glitches, liquidity imbalances, and algorithmic trading dynamics can destabilize even well-established foreign-listed stocks. For investors in emerging market ADRs, the episode serves as a stark reminder of the systemic risks embedded in cross-border trading mechanisms.

The Infosys ADR Incident: A Perfect Storm of Technical and Market Forces

On December 19, 2025, Infosys ADRs on the NYSE surged nearly 40% within minutes of market open, peaking at $30.00 before trading was halted under the Limit Up–Limit Down (LULD) mechanism. This abrupt movement occurred despite Infosys shares in India rising only 0.7% to Rs 1,638 on the National Stock Exchange (NSE), highlighting a disconnection between the ADR and its underlying asset.

The surge was triggered by a ticker mapping error in financial data feeds, which mislabeled Infosys ADRs as a different security. Automated trading algorithms misinterpreted the erroneous data and initiated rapid, compounding trades. Simultaneously, a short squeeze intensified the price action: a large institutional lender recalled a significant volume of lent shares, reducing ADR supply and forcing short sellers to cover positions. Low liquidity exacerbated the volatility - exacerbated by the end-of-year holiday season - allowed algorithmic trades to push the stock to extreme levels.

Algorithmic Feedback Loops and Liquidity Gaps

The incident underscores the fragility of ADR markets during periods of low trading activity. ADRs, by design, rely on the underlying domestic market for price discovery, but time zone differences create a communication vacuum when the source market is closed. In this vacuum, algorithmic systems-driven by real-time data anomalies-can dominate price action.

High-frequency trading algorithms amplified the initial surge. This created a self-reinforcing feedback loop: rising prices attracted more algorithmic buyers, further inflating the ADR's value. The NYSE's LULD mechanism proved insufficient to contain the volatility.

Implications for Emerging Market ADR Investors

The Infosys case highlights three critical risks for investors in emerging market ADRs:
1. Technical Vulnerabilities: A single error in ticker mapping or feed distribution can trigger cascading algorithmic trades.
2. Liquidity Imbalances: ADR markets often trade with lower volumes than their domestic counterparts, making them prone to sharp price swings during short squeezes or recall events.
3. Cross-Market Disconnects: ADR prices can diverge significantly from underlying domestic prices, especially during periods of limited communication or market closure.

For investors, these risks necessitate a reevaluation of ADR-based strategies. Diversification across ADRs with varying liquidity profiles and hedging against algorithmic-driven volatility may mitigate exposure. Additionally, monitoring ADR-specific risks-such as stock lending activity and data feed reliability-can provide early warnings of potential instability.

Regulatory and Structural Reforms: A Path Forward

The incident has sparked calls for regulatory interventions. Proposals include dual-verification systems for data feeds to prevent erroneous ticker mappings and enhanced transparency in ADR lending practices to reduce short squeeze risks. For emerging markets, where ADRs often serve as the primary gateway for foreign capital, such reforms could bolster market stability and investor confidence.

Conclusion

The Infosys ADR incident of December 2025 is a cautionary tale of how technical glitches and liquidity imbalances can create artificial volatility in foreign-listed stocks. As algorithmic trading becomes increasingly dominant, investors must recognize the unique risks inherent in ADRs-particularly those tied to emerging markets. By understanding these vulnerabilities and advocating for structural safeguards, investors can better navigate the complexities of cross-border equity markets.