DP13880 Clients' Connections: Measuring the Role of Private Information in Decentralised Markets

Author(s):	Péter Kondor, Gabor Pinter
Publication Date:	July 2019
Keyword(s):	Client-Dealer Connections, Government Bond Market, private information
JEL(s):	G12, G14, G24
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13880

We propose a new measure of private information in decentralised markets -- connections -- defined as the number of dealers with whom a client trades in a time period. Using proprietary data for the UK government bond market, we show that clients have systematically better performance when having more connections, and this effect is stronger during macroeconomic announcements. Time-variation in market-wide connections also helps explain yield dynamics. Given our novel measure, we present two applications suggesting that (i) dealers pass on information, acquired from their informed clients, to their subsidiaries, and (ii) informed clients better predict the order-flow intermediated by their dealers.