Working Paper: NBER ID: w22461
Authors: 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. A central question is: Should a dealer who acquires information by taking client orders be allowed to use or 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 counter-factuals. 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 its key features.
Keywords: Information Sharing; Treasury Auctions; Market Microstructure; Collusion; Auction Revenue
JEL Codes: D44; G14; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| full information sharing (D83) | yearly auction revenues (D44) |
| Chinese wall policy (G18) | auction revenues (D44) |
| information sharing enables collusion (D16) | revenue (H27) |
| prohibition of information sharing (L96) | costs for investors (G31) |
| dealers share information with clients (G24) | investor welfare (G24) |
| dealers share information with each other (L81) | investor welfare (G24) |
| negative news (G14) | bid through intermediaries (D44) |
| bad news (Y70) | effects on auction outcomes (D44) |