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Macro news, risk-free rates, and the intermediary: customer orders for thirty-year Treasury futures

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Author Info
Albert J. Menkveld
Asani Sarkar
Michel van der Wel

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Abstract

Customer order flow correlates with permanent price changes in equity and non-equity markets. We examine macro news events in the thirty-year Treasury futures market to identify causality from customer flow to risk-free rates. We remove the positive feedback trading effect and establish that, in the fifteen minutes subsequent to the news, intermediaries rely on customer orders to determine a substantial part of the announcement’s effect on risk-free rates—about one-third relative to the instantaneous effect. Intermediaries appear to benefit from privately observing informed customers, since their own-account trade profitability correlates with access to customer flow, controlling for volatility, competition, and the macro “surprise.”

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 307.

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Date of creation: 2007
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Handle: RePEc:fip:fednsr:307

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Keywords: Futures ; Treasury bonds ; Intermediation (Finance) ; Macroeconomics ; Financial markets ; Stock - Prices;

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  4. Wahal, Sunil, 1997. "Entry, Exit, Market Makers, and the Bid-Ask Spread," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(3), pages 871-901.
  5. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2004. "Order preferencing and market quality on NASDAQ before and after decimalization," Journal of Financial Economics, Elsevier, vol. 71(3), pages 581-612, March. [Downloadable!] (restricted)
  6. Paolo Pasquariello & Clara Vega, 2006. "Informed and strategic order flow in the bond markets," International Finance Discussion Papers 874, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  7. Chakravarty, Sugato & Li, Kai, 2003. "An examination of own account trading by dual traders in futures markets," Journal of Financial Economics, Elsevier, vol. 69(2), pages 375-397, August. [Downloadable!] (restricted)
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  8. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September. [Downloadable!] (restricted)
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  10. Fishman, Michael J & Longstaff, Francis A, 1992. " Dual Trading in Futures Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 643-71, June. [Downloadable!] (restricted)
  11. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  12. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1996. " Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow," Journal of Finance, American Finance Association, vol. 51(3), pages 811-33, July. [Downloadable!] (restricted)
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  13. Benveniste, Lawrence M. & Marcus, Alan J. & Wilhelm, William J., 1992. "What's special about the specialist?," Journal of Financial Economics, Elsevier, vol. 32(1), pages 61-86, August. [Downloadable!] (restricted)
  14. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October. [Downloadable!] (restricted)
  15. Madrigal, Vicente, 1996. " Non-fundamental Speculation," Journal of Finance, American Finance Association, vol. 51(2), pages 553-78, June. [Downloadable!] (restricted)
  16. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108. [Downloadable!]
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  17. Sanford J. Grossman, . "An Economic Analysis of Dual Trading," Rodney L. White Center for Financial Research Working Papers 33-89, Wharton School Rodney L. White Center for Financial Research.
  18. Manaster, Steven & Mann, Steven C, 1996. "Life in the Pits: Competitive Market Making and Inventory Control," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(3), pages 953-75. [Downloadable!] (restricted)
  19. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March. [Downloadable!] (restricted)
  20. Roell, Ailsa, 1990. "Dual-capacity trading and the quality of the market," Journal of Financial Intermediation, Elsevier, vol. 1(2), pages 105-124, June. [Downloadable!] (restricted)
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