Price and Size Discovery in Financial Markets: Evidence from the U.S. Treasury Securities Market

Abstract

We study the workup protocol, an important size discovery mechanism in the U.S. Treasury market. We find that workup order flow shocks explain 6%–8% of the variation of returns on benchmark notes and, across maturities, 10% of the variation of the yield curve level factor. Information related to proprietary client order flow is more likely to show up in workup trades, whereas information derived from public announcements tends to come through preworkup trades. Our findings highlight how the nature of information affects the trade-off between speed and execution price when informed traders choose between the lit and workup channels. Received May 3, 2017; Editorial decision August 1, 2018 by Editor Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. Internet Appendix tables are numbered with “IA” prefix.

Market Structure and Transaction Costs of Index CDSs

“…Finally, the cointegrated VAR model separates the price impact of a workup from that of the initiating trade in the limit order book, with workups having very little price impact at any horizon. The finding that a workup has a much lower price impact than the initiating trade in the limit order book is consistent with evidence from the interdealer Treasury market reported in Fleming and Nguyen (2019).…”

“…12 While, to our knowledge, this is the first study of size-discovery mechanisms in swap markets, such trading protocols are widely used in the equity market (in the form of mid-point dark pools) and in the Treasury market (in the form of workups); see, for example, Comerton-Forde and Putniņš (2015) and Fleming and Nguyen (2019). clients are differentially informed and can signal their "type" to dealers (see, for example, Seppi (1990) and Lee and Wang (2016)).…”

Pre-Refunding Announcement Gains in U.S. Treasurys

“…However, the majority of the trades take place during the US trading hours. Fleming (1997) notes that "more than 94 percent of that trading occurs in New York, on average, with less than 4 percent in London and less than 2 percent in Tokyo. "Accordingly, we follow the practice of Fleming (1997) and Adrian et al (2023) by confining our analysis to New York trading hours (07:30 to 17:00…”

A Survey of the Microstructure of Fixed-Income Markets

“…24 The importance of a workup mechanism in Treasuries in which additional size can be transacted immediately after a transaction at the specified price is highlighted by Boni and Leach (2004). Fleming and Nguyen (2020), Fleming, Schaumburg, and Yang (2015), and Schaumburg and Yang (2016). Duffie and Zhu (2017) show that such a workup or dark pool mechanism can limit the allocative inefficiency that may result from larger transactions, but because of adverse selection about the order imbalances of other investors would only be used by investors with relatively large position imbalances.…”