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

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.