Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-15T08:29:38.457Z Has data issue: false hasContentIssue false
  • English
  • Français

Customer Order Flow, Intermediaries, and Discovery of the Equilibrium Risk-Free Rate

Published online by Cambridge University Press:  20 April 2012

Albert J. Menkveld ,
Asani Sarkar  and
Michel van der Wel
Get access Rights & Permissions [Opens in a new window]

Abstract

Macro announcements change the equilibrium risk-free rate. We find that Treasury prices reflect part of the impact instantaneously, but intermediaries rely on their customer order flow after the announcement to discover the full impact. This customer flow informativeness is strongest when analyst macro forecasts are most dispersed. The result holds for 30-year Treasury futures trading in both electronic and open-outcry markets. We further show that intermediaries benefit from privately recognizing informed customer flow, as their own-account trading profitability correlates with customer order access.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 4 , August 2012 , pp. 821 - 849
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, G.; McQueen, G.; and Wood, R. “The Effects of Inflation News on High Frequency Stock Returns.” Journal of Business, 77 (2004), 547–574.CrossRefGoogle Scholar
Anand, A., and Subrahmanyam, A. “Information and the Intermediary: Are Market Intermediaries Informed Traders in Electronic Markets?” Journal of Financial and Quantitative Analysis, 43 (2008), 1–28.CrossRefGoogle Scholar
Benveniste, L. M.; Marcus, A. J.; and Wilhelm, W. J. “What’s So Special about the Specialist?” Journal of Financial Economics, 32 (1992), 61–86.CrossRefGoogle Scholar
Boehmer, E.; Jones, C. M.; and Zhang, X. “Which Shorts Are Informed?” Journal of Finance, 63 (2008), 491–527.CrossRefGoogle Scholar
Brandt, M. W., and Kavajecz, K. A. “Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve.” Journal of Finance, 59 (2004), 2623–2654.CrossRefGoogle Scholar
Chakravarty, S., and Li, K. “An Examination of Own Account Trading by Dual Traders in Futures Markets.” Journal of Financial Economics, 69 (2003), 375–397.CrossRefGoogle Scholar
Chang, E. C.; Locke, P. R.; and Mann, S. C. “The Effect of CME Rule 552 on Dual Traders.” Journal of Futures Markets, 14 (1994), 493–510.CrossRefGoogle Scholar
Chung, K. H.; Chuwonganant, C.; and McCormick, D. T. “Order Preferencing and Market Quality on NASDAQ before and after Decimalization.” Journal of Financial Economics, 71 (2004), 581–612.CrossRefGoogle Scholar
Easley, D.; Kiefer, N. M.; and O’Hara, M. “Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow.” Journal of Finance, 51 (1996), 811–833.Google Scholar
Ederington, L. H., and Lee, J. H. “How Markets Process Information: News Releases and Volatility.” Journal of Finance, 45 (1993), 1161–1191.CrossRefGoogle Scholar
Engelberg, J. E.; Reed, A. V.; and Ringgenberg, M. C. “How Are Shorts Informed? Short Sellers, News, and Information Processing.” Journal of Financial Economics, 105 (2012), 260–278.CrossRefGoogle Scholar
Evans, M. D. D., and Lyons, R. K. “Orderflow and Exchange Rate Dynamics.” Journal of Political Economy, 110 (2002), 170–180.CrossRefGoogle Scholar
Evans, M. D. D., and Lyons, R. K. “How Is Macro News Transmitted to Exchange Rates?” Journal of Financial Economics, 88 (2008), 26–50.CrossRefGoogle Scholar
Fishman, M. J., and Longstaff, F. A. “Dual Trading in Futures Markets.” Journal of Finance, 47 (1992), 643–671.CrossRefGoogle Scholar
Fleming, M. J., and Remolona, E. M. “Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information.” Journal of Finance, 54 (1999), 1901–1915.CrossRefGoogle Scholar
Gallmeyer, M. F.; Hollifield, B.; and Seppi, D. J.“Demand Discovery and Asset Pricing.” Working Paper, Carnegie Mellon University (2005).CrossRefGoogle Scholar
Glosten, L. R., and Milgrom, P. R. “Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Agents.” Journal of Financial Economics, 14 (1985), 71–100.CrossRefGoogle Scholar
Green, R. C.; Hollifield, B.; and Schürhoff, N. “Financial Intermediation and the Costs of Trading in an Opaque Market.” Review of Financial Studies, 20 (2007), 275–314.CrossRefGoogle Scholar
Green, T. C. “Economic News and the Impact of Trading on Bond Prices.” Journal of Finance, 59 (2004), 1201–1233.CrossRefGoogle Scholar
Grossman, S. J. “An Economic Analysis of Dual Trading.” Working Paper, University of Pennsylvania (1989).Google Scholar
Heiner, R. A. “The Origin of Predictable Behavior.” American Economic Review, 73 (1983), 560–595.Google Scholar
Kim, O., and Verrecchia, R. E. “Market Liquidity and Volume around Earnings Announcements.” Journal of Accounting and Economics, 17 (1994), 41–67.CrossRefGoogle Scholar
Kim, O., and Verrecchia, R. E. “Pre-Announcement and Event-Period Information.” Journal of Accounting and Economics, 24 (1997), 395–419.CrossRefGoogle Scholar
Kurov, A., and Lasser, D. J. “Price Dynamics in the Regular and E-Mini Futures Markets.” Journal of Financial and Quantitative Analysis, 39 (2004), 365–384.CrossRefGoogle Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 1315–1335.CrossRefGoogle Scholar
Madrigal, V. “Non-Fundamental Speculation.” Journal of Finance, 51 (1996), 553–578.Google Scholar
Manaster, S., and Mann, S. C. “Life in the Pits: Competitive Market Making and Inventory Control.” Review of Financial Studies, 9 (1996), 953–975.CrossRefGoogle Scholar
McQueen, G., and Roley, V. V. “Stock Prices, News, and Business Conditions.” Review of Financial Studies, 6 (1993), 683–707.CrossRefGoogle Scholar
Newey, W. K., and West, K. D. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pan, J., and Poteshman, A. M. “The Information in Option Volume for Future Stock Prices.” Review of Financial Studies, 19 (2006), 871–908.CrossRefGoogle Scholar
Pasquariello, P., and Vega, C. “Informed and Strategic Order Flow in the Bond Market.” Review of Financial Studies, 20 (2007), 1975–2019.CrossRefGoogle Scholar
Pearce, D. K., and Roley, V. V. “Stock Prices and Economic News.” Journal of Business, 58 (1985), 49–67.CrossRefGoogle Scholar
Roell, A. “Dual-Capacity Trading and the Quality of the Market.” Journal of Financial Intermediation, 1 (1990), 105–124.CrossRefGoogle Scholar
Saar, G.“Systematic Liquidity and Learning about the Risk Premium.” Working Paper, Cornell University (2006).Google Scholar
Sarkar, A. “Dual Trading: Winners, Losers, and Market Impact.” Journal of Financial Intermediation, 4 (1995), 77–93.CrossRefGoogle Scholar
Wahal, S. “Entry, Exit, Market Makers, and the Bid-Ask Spread.” Review of Financial Studies, 10 (1997), 871–901.CrossRefGoogle Scholar
Walras, L.Elements d’Economique Politique Pure, ou Theorie de la Richesse Sociale. Lausanne: Rouge (1889).Google Scholar