NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Order Flow and the Formation of Dealer Bids: Information Flows and Strategic Behavior in the Government of Canada Securities Auctions

Ali Hortacsu, Samita Sareen

NBER Working Paper No. 11116
Issued in February 2005
NBER Program(s):   IO

Is order-flow an important component of private information possessed by traders in government securities markets? Utilizing a detailed data set on Government of Canada securities auctions, we argue that the answer is yes. Direct participation in these auctions is limited to government securities dealers. However, non-dealer customers can also submit bids through dealers. We document patterns of strategic behavior by both sides of the market, dealers and customers, that support the hypothesis that customer bids provide valuable order-flow information to dealers. Dealer bids respond to privately observed customer bids, and dealers observing customer bid can predict the auction cutoff price better. Customers also respond strategically to dealers' use of the information contained in their bids.

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Document Object Identifier (DOI): 10.3386/w11116

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