Skip to main content
    • Aa
    • Aa

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


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.

Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

G. Adams ; G. McQueen ; and R. Wood The Effects of Inflation News on High Frequency Stock Returns.” Journal of Business, 77 (2004), 547574.

L. M. Benveniste ; A. J. Marcus ; and W. J. Wilhelm What’s So Special about the Specialist?Journal of Financial Economics, 32 (1992), 6186.

E. Boehmer ; C. M. Jones ; and X. Zhang Which Shorts Are Informed?Journal of Finance, 63 (2008), 491527.

M. W. Brandt , and K. A. Kavajecz Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve.” Journal of Finance, 59 (2004), 26232654.

S. Chakravarty , and K. Li An Examination of Own Account Trading by Dual Traders in Futures Markets.” Journal of Financial Economics, 69 (2003), 375397.

E. C. Chang ; P. R. Locke ; and S. C. Mann The Effect of CME Rule 552 on Dual Traders.” Journal of Futures Markets, 14 (1994), 493510.

K. H. Chung ; C. Chuwonganant ; and D. T. McCormick Order Preferencing and Market Quality on NASDAQ before and after Decimalization.” Journal of Financial Economics, 71 (2004), 581612.

D. Easley ; N. M. Kiefer ; and M. O’Hara Cream-Skimming or Profit-Sharing? The Curious Role of Purchased Order Flow.” Journal of Finance, 51 (1996), 811833.

J. E. Engelberg ; A. V. Reed ; and M. C. Ringgenberg How Are Shorts Informed? Short Sellers, News, and Information Processing.” Journal of Financial Economics, 105 (2012), 260278.

M. D. D. Evans , and R. K. Lyons Orderflow and Exchange Rate Dynamics.” Journal of Political Economy, 110 (2002), 170180.

M. D. D. Evans , and R. K. Lyons How Is Macro News Transmitted to Exchange Rates?Journal of Financial Economics, 88 (2008), 2650.

M. J. Fishman , and F. A. Longstaff Dual Trading in Futures Markets.” Journal of Finance, 47 (1992), 643671.

M. J. Fleming , and E. M. Remolona Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information.” Journal of Finance, 54 (1999), 19011915.

L. R. Glosten , and P. R. Milgrom Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Agents.” Journal of Financial Economics, 14 (1985), 71100.

R. C. Green ; B. Hollifield ; and N. Schürhoff Financial Intermediation and the Costs of Trading in an Opaque Market.” Review of Financial Studies, 20 (2007), 275314.

T. C Green . “Economic News and the Impact of Trading on Bond Prices.” Journal of Finance, 59 (2004), 12011233.

O. Kim , and R. E. Verrecchia Market Liquidity and Volume around Earnings Announcements.” Journal of Accounting and Economics, 17 (1994), 4167.

O. Kim , and R. E. Verrecchia Pre-Announcement and Event-Period Information.” Journal of Accounting and Economics, 24 (1997), 395419.

A. S Kyle . “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 13151335.

V. Madrigal Non-Fundamental Speculation.” Journal of Finance, 51 (1996), 553578.

S. Manaster , and S. C. Mann Life in the Pits: Competitive Market Making and Inventory Control.” Review of Financial Studies, 9 (1996), 953975.

G. McQueen , and V. V. Roley Stock Prices, News, and Business Conditions.” Review of Financial Studies, 6 (1993), 683707.

W. K. Newey , and K. D. West A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.

J. Pan , and A. M. Poteshman The Information in Option Volume for Future Stock Prices.” Review of Financial Studies, 19 (2006), 871908.

P. Pasquariello , and C. Vega Informed and Strategic Order Flow in the Bond Market.” Review of Financial Studies, 20 (2007), 19752019.

D. K. Pearce , and V. V. Roley Stock Prices and Economic News.” Journal of Business, 58 (1985), 4967.

A. Roell Dual-Capacity Trading and the Quality of the Market.” Journal of Financial Intermediation, 1 (1990), 105124.

A. Sarkar Dual Trading: Winners, Losers, and Market Impact.” Journal of Financial Intermediation, 4 (1995), 7793.

S. Wahal Entry, Exit, Market Makers, and the Bid-Ask Spread.” Review of Financial Studies, 10 (1997), 871901.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *