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Automation versus Intermediation: Evidence from Treasuries Going Off the Run

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Author Info
MICHAEL J. BARCLAY
TERRENCE HENDERSHOTT
KENNETH KOTZ
Abstract

This paper examines the choice of trading venue by dealers in U.S. Treasury securities to determine when services provided by human intermediaries are difficult to replicate in fully automated trading systems. When Treasury securities go "off the run" their trading volume drops by more than 90%. This decline in trading volume allows us to test whether intermediaries' knowledge of the market and its participants can uncover hidden liquidity and facilitate better matching of customer orders in less active markets. Consistent with this hypothesis, the market share of electronic intermediaries falls from 81% to 12% when securities go off the run. Copyright 2006 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2006.01061.x
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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 5 (October)
Pages: 2395-2414
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Handle: RePEc:bla:jfinan:v:61:y:2006:i:5:p:2395-2414

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005. "Over-the-Counter Markets," Econometrica, Econometric Society, vol. 73(6), pages 1815-1847, November. [Downloadable!] (restricted)
  2. T. Clifton Green, 2004. "Economic News and the Impact of Trading on Bond Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1201-1234, 06. [Downloadable!] (restricted)
  3. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January. [Downloadable!] (restricted)
  4. Peter C. Reiss & Ingrid M. Werner, 1998. "Does Risk Sharing Motivate Interdealer Trading?," Journal of Finance, American Finance Association, vol. 53(5), pages 1657-1703, October. [Downloadable!] (restricted)
  5. Huang, Roger D. & Cai, Jun & Wang, Xiaozu, 2002. "Information-Based Trading in the Treasury Note Interdealer Broker Market," Journal of Financial Intermediation, Elsevier, vol. 11(3), pages 269-296, July. [Downloadable!] (restricted)
  6. Bessembinder, Hendrik & Venkataraman, Kumar, 2004. "Does an electronic stock exchange need an upstairs market?," Journal of Financial Economics, Elsevier, vol. 73(1), pages 3-36, July. [Downloadable!] (restricted)
  7. Michael J. Fleming, 1997. "The round-the-clock market for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-32. [Downloadable!]
  8. Madhavan, Ananth & Sofianos, George, 1998. "An empirical analysis of NYSE specialist trading1," Journal of Financial Economics, Elsevier, vol. 48(2), pages 189-210, May. [Downloadable!] (restricted)
  9. Fleming, Michael J, 2002. "Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 707-35, August.
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  10. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, vol. 140(1), pages 66-96, May. [Downloadable!] (restricted)
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  11. H. Henry Cao & Richard K. Lyons & Martin D.D. Evans, 2003. "Inventory Information," NBER Working Papers 9893, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. G. Geoffrey Booth & Ji-Chai Lin & Teppo Martikainen & Yiuman Tse, 2002. "Trading and Pricing in Upstairs and Downstairs Stock Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(4), pages 1111-1135.
  13. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(1), pages 1-36. [Downloadable!] (restricted)
  14. Michael J. Barclay & Terrence Hendershott & D. Timothy McCormick, 2003. "Competition among Trading Venues: Information and Trading on Electronic Communications Networks," Journal of Finance, American Finance Association, vol. 58(6), pages 2637-2666, December. [Downloadable!] (restricted)
  15. Bollen, Nicolas P. B. & Smith, Tom & Whaley, Robert E., 2004. "Modeling the bid/ask spread: measuring the inventory-holding premium," Journal of Financial Economics, Elsevier, vol. 72(1), pages 97-141, April. [Downloadable!] (restricted)
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  18. Bessembinder, Hendrik & Kaufman, Herbert M., 1997. "A cross-exchange comparison of execution costs and information flow for NYSE-listed stocks," Journal of Financial Economics, Elsevier, vol. 46(3), pages 293-319, December. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dunne, Peter & Hau, Harald & Moore, Michael, 2008. "A Tale of Two Platforms: Dealer Intermediation in the European Sovereign Bond Market," CEPR Discussion Papers 6969, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Bruce Mizrach & Christopher J. Neely, 2006. "The transition to electronic communications networks in the secondary treasury market," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 527-542. [Downloadable!]
  3. Yalin Gündüz & Torsten Lüdecke & Marliese Uhrig-Homburg, 2007. "Trading Credit Default Swaps via Interdealer Brokers," Journal of Financial Services Research, Springer, vol. 32(3), pages 141-159, December. [Downloadable!] (restricted)
  4. Bruce Mizrach & Christopher J. Neely, 2007. "The microstructure of the U.S. treasury market," Working Papers 2007-052, Federal Reserve Bank of St. Louis. [Downloadable!]
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