Discussion Paper Details

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

Author(s): Nina Boyarchenko, David O Lucca and Laura Veldkamp

Publication Date: September 2016

Keyword(s): asymmetric information, auctions, Financial Intermediation and Treasury

Programme Area(s): Financial Economics, Industrial Organization and Monetary Economics and Fluctuations

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 counter-factuals. We estimate that yearly auction revenues would be $2.4 billion higher with full-information sharing with clients and between dealers. When information sharing enables collusion, the collusion costs revenue; but if dealers share information with clients, prohibiting information sharing may cost more. For investors, the welfare effects of information sharing depend on how information is shared. The model shows that investors can benefit when dealers share information with each other, not when they share more with clients.

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Bibliographic Reference

Boyarchenko, N, Lucca, D and Veldkamp, L. 2016. 'Taking Orders and Taking Notes: Dealer Information Sharing in Treasury Markets'. London, Centre for Economic Policy Research.