Order Flow and the Formation of Dealer Bids in Treasury Auctions
Using data on Government of Canada securities auctions, this paper shows that in countries where direct access to primary debt issuance is restricted to government securities dealers, "order-flow" information is potentially the key source of private information for these security dealers. "Order-flow" information is revealed to a security dealer through his interactions with customers, who can place bids in the auctions only through the security dealer. Since each dealer interacts with a different set of customers, they, in effect, see different portions of the market demand and supply curves, leading to differing private inferences of where the equilibrium price might lie. We document several pieces of evidence consistent with the strategic response of dealers and customers to the presence of valuable information in their interactions.
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