IDEAS home Printed from https://ideas.repec.org/p/rut/rutres/200803.html
   My bibliography  Save this paper

The Microstructure of a U.S. Treasury ECN: The Brokertec Platform

Author

Listed:
  • Michael Fleming

    (Federal Reserve Bank of New York)

  • Bruce Mizrach

    (Rutgers University)

Abstract

This paper assesses the microstructure of the U.S. Treasury securities market using tick data from the BrokerTec electronic trading platform. We examine trading activity, bid-ask spreads, and depth for the on-the-run 2-, 3-, 5-, 10- and 30-year securities and find that liquidity is markedly greater than that reported by earlier studies using data from GovPX. We analyze the price impact of trades and find that the effects are overstated if order book changes are ignored, and that order book changes affect prices by themselves. We also explore a novel feature of this platform – the ability to enter "iceberg" orders – and find that such orders are more common when price volatility is higher, as predicted by theory.

Suggested Citation

  • Michael Fleming & Bruce Mizrach, 2008. "The Microstructure of a U.S. Treasury ECN: The Brokertec Platform," Departmental Working Papers 200803, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:200803
    as

    Download full text from publisher

    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1433488
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-442, October.
    2. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108.
    3. Engle, Robert F. & Patton, Andrew J., 2004. "Impacts of trades in an error-correction model of quote prices," Journal of Financial Markets, Elsevier, vol. 7(1), pages 1-25, January.
    4. Michael J. Barclay & Terrence Hendershott & Kenneth Kotz, 2006. "Automation versus Intermediation: Evidence from Treasuries Going Off the Run," Journal of Finance, American Finance Association, vol. 61(5), pages 2395-2414, October.
    5. Bryan Campbell & Scott Hendry, 2007. "Price Discovery in Canadian and U.S. 10-Year Government Bond Markets," Staff Working Papers 07-43, Bank of Canada.
    6. David Goldreich & Bernd Hanke & Purnendu Nath, 2005. "The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market," Review of Finance, Springer, vol. 9(1), pages 1-32, March.
    7. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Dec), pages 31-50.
    8. Hautsch, Nikolaus & Huang, Ruihong, 2012. "The market impact of a limit order," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 501-522.
    9. Bruce Mizrach & Christopher J. Neely, 2006. "The transition to electronic communications networks in the secondary treasury market," Review, Federal Reserve Bank of St. Louis, vol. 88(Nov), pages 527-542.
    10. Faust, Jon & Rogers, John H. & Wang, Shing-Yi B. & Wright, Jonathan H., 2007. "The high-frequency response of exchange rates and interest rates to macroeconomic announcements," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1051-1068, May.
    11. Cheng Gao & Bruce Mizrach, 2018. "High Frequency Trading in the Equity Markets During US Treasury POMO," Dynamic Modeling and Econometrics in Economics and Finance, in: Fredj Jawadi (ed.), Uncertainty, Expectations and Asset Price Dynamics, pages 81-103, Springer.
    12. Cheung, Yiu Chung & de Jong, Frank & Rindi, Barbara, 2005. "Trading European sovereign bonds: the microstructure of the MTS trading platforms," Working Paper Series 432, European Central Bank.
    13. Boni, Leslie & Leach, Chris, 2004. "Expandable limit order markets," Journal of Financial Markets, Elsevier, vol. 7(2), pages 145-185, February.
    14. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. "An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-1689, December.
    15. Saar, Gideon, 2001. "Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation," The Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1153-1181.
    16. Michael J. Fleming, 2002. "Are larger Treasury issues more liquid? Evidence from bill reopenings," Proceedings, Federal Reserve Bank of Cleveland, pages 707-739.
    17. Michael J. Fleming, 1997. "The round-the-clock market for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Jul), pages 9-32.
    18. Jiang, George J. & Lo, Ingrid, 2014. "Private information flow and price discovery in the U.S. treasury market," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 118-133.
    19. Alex Boulatov & Thomas J. George, 2013. "Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers," The Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 2096-2137.
    20. Bessembinder, Hendrik & Panayides, Marios & Venkataraman, Kumar, 2009. "Hidden liquidity: An analysis of order exposure strategies in electronic stock markets," Journal of Financial Economics, Elsevier, vol. 94(3), pages 361-383, December.
    21. Fredj Jawadi (ed.), 2018. "Uncertainty, Expectations and Asset Price Dynamics," Dynamic Modeling and Econometrics in Economics and Finance, Springer, number 978-3-319-98714-9, July-Dece.
    22. Bruce Mizrach, 2008. "The next tick on Nasdaq," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 19-40.
    23. Paolo Pasquariello & Clara Vega, 2007. "Informed and Strategic Order Flow in the Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1975-2019, November.
    24. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957.
    25. Hasbrouck, Joel, 1991. "Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    26. 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.
    27. Michael W. Brandt & Kenneth A. Kavajecz & Shane E. Underwood, 2007. "Price discovery in the treasury futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(11), pages 1021-1051, November.
    28. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
    29. Mizrach, Bruce & Neely, Christopher J., 2008. "Information shares in the US Treasury market," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1221-1233, July.
    30. Hasbrouck, Joel, 1991. "The Summary Informativeness of Stock Trades: An Econometric Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 571-595.
    31. Balduzzi, Pierluigi & Elton, Edwin J. & Green, T. Clifton, 2001. "Economic News and Bond Prices: Evidence from the U.S. Treasury Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(4), pages 523-543, December.
    32. David Goldreich & Bernd Hanke & Purnendu Nath, 2005. "The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market," Review of Finance, European Finance Association, vol. 9(1), pages 1-32.
    33. 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, June.
    34. Runkle, David E, 1987. "Vector Autoregressions and Reality: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 454-454, October.
    35. Christopher Chung & Bryan Campbell & Scott Hendry, 2007. "Price Discovery in Canadian Government Bond Futures and Spot Markets," Staff Working Papers 07-4, Bank of Canada.
    36. Mardi Dungey & Olan Henry & Michael Mckenzie, 2013. "Modeling trade duration in U.S. Treasury markets," Quantitative Finance, Taylor & Francis Journals, vol. 13(9), pages 1431-1442, September.
    37. Michael W. Brandt & Kenneth A. Kavajecz, 2004. "Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve," Journal of Finance, American Finance Association, vol. 59(6), pages 2623-2654, December.
    38. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael J Fleming & Giang Nguyen, 2019. "Price and Size Discovery in Financial Markets: Evidence from the U.S. Treasury Securities Market," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 9(2), pages 256-295.
    2. Nguyen, Giang & Engle, Robert & Fleming, Michael & Ghysels, Eric, 2020. "Liquidity and volatility in the U.S. Treasury market," Journal of Econometrics, Elsevier, vol. 217(2), pages 207-229.
    3. Fricke, Christoph & Menkhoff, Lukas, 2011. "Does the "Bund" dominate price discovery in Euro bond futures? Examining information shares," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1057-1072, May.
    4. He, Yan & Lin, Hai & Wang, Junbo & Wu, Chunchi, 2009. "Price discovery in the round-the-clock U.S. Treasury market," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 464-490, July.
    5. Dungey, Mardi & McKenzie, Michael & Smith, L. Vanessa, 2009. "Empirical evidence on jumps in the term structure of the US Treasury Market," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 430-445, June.
    6. Mizrach, Bruce & Neely, Christopher J., 2008. "Information shares in the US Treasury market," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1221-1233, July.
    7. Bruce Mizrach & Christopher J. Neely, 2007. "The microstructure of the U.S. treasury market," Working Papers 2007-052, Federal Reserve Bank of St. Louis.
    8. Coluzzi, Chiara & Ginebri, Sergio & Turco, Manuel, 2008. "Measuring and Analyzing the Liquidity of the Italian Treasury Security Wholesale Secondary Market," Economics & Statistics Discussion Papers esdp08044, University of Molise, Department of Economics.
    9. Jiang, George J. & Lo, Ingrid, 2014. "Private information flow and price discovery in the U.S. treasury market," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 118-133.
    10. Chatrath, Arjun & Christie-David, Rohan A. & Lee, Kiseop & Moore, William T., 2009. "Competitive inventory management in Treasury markets," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 800-809, May.
    11. Paolo Pasquariello & Clara Vega, 2007. "Informed and Strategic Order Flow in the Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1975-2019, November.
    12. Pasquariello, Paolo & Vega, Clara, 2009. "The on-the-run liquidity phenomenon," Journal of Financial Economics, Elsevier, vol. 92(1), pages 1-24, April.
    13. Torben G. Andersen & Luca Benzoni, 2010. "Do Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification Test for Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 65(2), pages 603-653, April.
    14. Dumitru, Ana-Maria & Urga, Giovanni, 2016. "Jumps and Information Asymmetry in the US Treasury Market," EconStor Preprints 130148, ZBW - Leibniz Information Centre for Economics.
    15. Kasing Man & Junbo Wang & Chunchi Wu, 2013. "Price Discovery in the U.S. Treasury Market: Automation vs. Intermediation," Management Science, INFORMS, vol. 59(3), pages 695-714, September.
    16. Lin, Hai & Lo, Ingrid & Qiao, Rui, 2021. "Macroeconomic news announcements and market efficiency: Evidence from the U.S. Treasury market," Journal of Banking & Finance, Elsevier, vol. 133(C).
    17. Kenneth Khang & Tao-Hsien Dolly King, 2010. "Short horizon liquidity and trading activity in the US Treasury market: do inventory holding costs matter?," Applied Financial Economics, Taylor & Francis Journals, vol. 20(14), pages 1085-1098.
    18. Paola Paiardini, 2010. "The Price Impact of Economic News, Private Information and Trading Intensity," Birkbeck Working Papers in Economics and Finance 1011, Birkbeck, Department of Economics, Mathematics & Statistics.
    19. Papavassiliou, Vassilios G. & Kinateder, Harald, 2021. "Information shares and market quality before and during the European sovereign debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    20. Caporale, Guglielmo Maria & Girardi, Alessandro & Paesani, Paolo, 2012. "Quoted spreads and trade imbalance dynamics in the European Treasury bond market," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(2), pages 173-182.

    More about this item

    Keywords

    microstructure; Treasury market; bid-ask spread; price impact; hidden orders;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rut:rutres:200803. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/derutus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.