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The Microstructure of the UK gilt market

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  • James Proudman

Abstract

This paper is a detailed study of trading patterns in the gilt market - based on all transactions in three gilts (6% Treasury 1999, 9 1/2% Treasury 2005, and 2 1/2% Index-linked 2016) from October 1993 to October 1994. The main finding of the paper is that order flow in the gilt market does not appear to have any significant effect on prices, market makers seem to use other information (such as public announcements and the price of the long gilt future) to set prices. The paper also finds that spreads are far narrower in the gilt market than in the equity market and that there is some tendency for spreads to fall with trade size (rather than rise as is found in the equity markets). Both these findings are consistent with a lack of information in order flow (since market makers are unlikely to lose money to more informed traders in the gilt market and so can offer better prices). Other findings include a tendency for turnover to be highest on Wednesdays and for intra-day turnover to show a 'U'-shaped pattern with trading concentrated in the early morning and late afternoon. It also finds a tendency for spreads to be wider when turnover is high.

Suggested Citation

  • James Proudman, 1995. "The Microstructure of the UK gilt market," Bank of England working papers 38, Bank of England.
  • Handle: RePEc:boe:boeewp:38
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1995/wp38.pdf
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    References listed on IDEAS

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    1. Perraudin,W. & Vitale,P., 1995. "Information Flows in the Foreign Exchange Markets," Cambridge Working Papers in Economics 9412, Faculty of Economics, University of Cambridge.
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    Cited by:

    1. Andrew Clare & Mark Johnson & James Proudman & Victoria Saporta, 1999. "The Impact of UK Macroeconomic Announcements on the Market for Gilts," CGFS Papers chapters,in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-16 Bank for International Settlements.
    2. Dunne, Peter G., 2000. "A generalised Bayesian model of market microstructure behaviour applied to the market in Irish government securities," International Review of Financial Analysis, Elsevier, vol. 9(4), pages 369-388.
    3. Vitale, Paolo, 1998. "Two months in the life of several gilt-edged market makers on the London Stock Exchange," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 299-324, December.
    4. Victoria Saporta, 1997. "Which Inter-dealer Market Prevails? An analysis of inter-dealer trading in opaque markets," Bank of England working papers 59, Bank of England.

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