Order Flow and the Formation of Dealer Bids: Information Flows and Strategic Behavior in the Government of Canada Securities Auctions

52 Pages Posted: 9 Mar 2005 Last revised: 28 Mar 2005

See all articles by Ali Hortacsu

Ali Hortacsu

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Samita Sareen

Independent

Date Written: February 2005

Abstract

Is order-flow an important component of private information possessed by traders in government securities markets? Utilizing a detailed data set on Government of Canada securities auctions, we argue that the answer is yes. Direct participation in these auctions is limited to government securities dealers. However, non-dealer customers can also submit bids through dealers. We document patterns of strategic behavior by both sides of the market, dealers and customers, that support the hypothesis that customer bids provide valuable order-flow information to dealers. Dealer bids respond to privately observed customer bids, and dealers observing customer bid can predict the auction cutoff price better. Customers also respond strategically to dealers' use of the information contained in their bids.

Suggested Citation

Hortacsu, Ali and Sareen, Samita, Order Flow and the Formation of Dealer Bids: Information Flows and Strategic Behavior in the Government of Canada Securities Auctions (February 2005). NBER Working Paper No. w11116. Available at SSRN: https://ssrn.com/abstract=667161

Ali Hortacsu (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-5841 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Samita Sareen

Independent

No Address Available

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