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Valuing Dealers' Informational Advantage: A Study of Canadian Treasury Auctions
Author(s) -
Hortaçsu Ali,
Kastl Jakub
Publication year - 2012
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta8365
Subject(s) - common value auction , treasury , competition (biology) , business , competitive advantage , reverse auction , value (mathematics) , microeconomics , economics , commerce , industrial organization , marketing , computer science , ecology , archaeology , machine learning , biology , history
In many financial markets, dealers have the advantage of observing the orders of their customers. To quantify the economic benefit that dealers derive from this advantage, we study detailed data from Canadian Treasury auctions, where dealers observe customer bids while preparing their own bids. In this setting, dealers can use information on customer bids to learn about (i) competition , that is, the distribution of competing bids in the auction, and (ii) fundamentals , that is, the ex post value of the security being auctioned. We devise formal hypothesis tests for both sources of informational advantage. In our data, we do not find evidence that dealers are learning about fundamentals. We find that the “information about competition” contained in customer bids accounts for 13–27% of dealers' expected profits.