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Federal Reserve Bank of New York
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Taking orders and taking notes: dealer information sharing in financial markets
Nina Boyarchenko
David O. Lucca
Laura Veldkamp
Abstract

The use of order flow information by financial firms has come to the forefront of the regulatory debate. Central to this discussion is whether a dealer who acquires information by taking client orders can 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 counterfactuals. We estimate that yearly auction revenues with full information sharing (with clients and between dealers) would be $5 billion higher than in a “Chinese Wall" regime in which no information is shared. When information sharing enables collusion, the collusion costs revenue, but prohibiting information sharing costs more. For investors, the welfare effects of information sharing depend on how information is shared. Surprisingly, investors benefit when dealers share information with each other, not when they share more with clients. For the market, when investors can bid directly, information sharing creates a new financial accelerator: Only investors with bad news bid through intermediaries, who then share that information with others. Thus, sharing amplifies the effect of negative news. Tests of two model predictions support the model’s key features.


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Nina Boyarchenko & David O. Lucca & Laura Veldkamp, Taking orders and taking notes: dealer information sharing in financial markets, Federal Reserve Bank of New York, Staff Reports 726, 01 Apr 2015, revised 01 Mar 2016.
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Note: Title formerly: Intermediaries as information aggregators: an application to U.S. treasury auctions
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Keywords: Treasury auction; primary dealers; financial intermediation; information aggregation
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