Depth Discovery in a Market with Expandable Limit Orders: An Investigation of the U.S. Treasury Market

52 Pages Posted: 28 Jul 2001

See all articles by Leslie Boni

Leslie Boni

California State University, Monterey Bay

J. Chris Leach

University of Colorado at Boulder - Department of Finance

Date Written: July 9, 2001

Abstract

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

Boni, Leslie A and Leach, J. Chris, Depth Discovery in a Market with Expandable Limit Orders: An Investigation of the U.S. Treasury Market (July 9, 2001). Available at SSRN: https://ssrn.com/abstract=277710 or http://dx.doi.org/10.2139/ssrn.277710

Leslie A Boni (Contact Author)

California State University, Monterey Bay ( email )

100 Campus Center
Seaside, CA 93955
United States

J. Chris Leach

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309-0419
United States
303-492-5665 (Phone)
303-492-5962 (Fax)

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