Taking Orders and Taking Notes: Dealer Information Sharing in Treasury Markets

57 Pages Posted: 22 Apr 2015

See all articles by Nina Boyarchenko

Nina Boyarchenko

Federal Reserve Bank of New York

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2016

Abstract

The use of order flow information by financial firms has come to the forefront of the regulatory debate. A central question is: Should a dealer who acquires information by taking client orders be allowed to use or share that information? We explore how information sharing affects dealers, clients, and issuer revenues in U.S. Treasury auctions. Because one cannot observe alternative information regimes, we build a model, calibrate it to auction results data, and use it to quantify counterfactuals. We estimate that yearly auction revenues with full information sharing (with clients and between dealers) would be $5 billion higher than in a “Chinese Wall” regime in which no information is shared. When information sharing enables collusion, the collusion costs revenue, but prohibiting information sharing costs more. For investors, the welfare effects of information sharing depend on how information is shared. Surprisingly, investors benefit when dealers share information with each other, not when they share more with clients. For the market, when investors can bid directly, information sharing creates a new financial accelerator: Only investors with bad news bid through intermediaries, who then share that information with others. Thus, sharing amplifies the effect of negative news. Tests of two model predictions support the model’s key features.

Keywords: Treasury auction, primary dealers, financial intermediation, information aggregation

JEL Classification: D04, G24, G28

Suggested Citation

Boyarchenko, Nina and Lucca, David O. and Veldkamp, Laura, Taking Orders and Taking Notes: Dealer Information Sharing in Treasury Markets (July 2016). FRB of New York Staff Report No. 726, Available at SSRN: https://ssrn.com/abstract=2597152 or http://dx.doi.org/10.2139/ssrn.2597152

Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

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David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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Laura Veldkamp

Columbia University - Columbia Business School ( email )

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United States

National Bureau of Economic Research (NBER)

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