Depth Discovery in a Market with Expandable Limit Orders: An Investigation of the U.S. Treasury Market
52 Pages Posted: 28 Jul 2001
Date Written: July 9, 2001
This paper studies the brokered interdealer trading activity of primary dealers in the secondary market for U.S. Treasury securities. Limit orders in this market are expandable: specifically, quotes represent a firm-price commitment to trade but also serve as an invitation for brokered one-on-one quantity negotiation. As a result, we find that few transactions (0.6% of dollar volume) receive price improvement but many transactions (45.1% of dollar volume) discover greater-than-quoted depth. We find evidence consistent with dealers' using expandable limit order strategies to reduce costs associated with information leakage and stale limit orders. Expandable orders, however, create queues for other dealers who must wait to transact. We find evidence consistent with dealers' willingness to use another broker at worse prices rather than wait in the queue of a broker with quantity negotiations in progress.
Keywords: Depth discovery, expandable orders, limit orders, order placement strategies, Treasury market
JEL Classification: G00, G14
Suggested Citation: Suggested Citation