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.

We assess dealer behavior in the specials market for US Treasury securities by comparing dealer participation in the Federal Reserve's securities loan auctions with prices in the private market. Dealer behavior is generally consistent with the law of one price and apparent violations can largely be explained by institutional differences between the private market and the Fed's program. However, for auctions that are effectively noncompetitive, dealers regularly pass up true arbitrage opportunities and frequently overpay to borrow securities. Dealers apparently do not realize that certain auctions are noncompetitive, even though the information needed to discern this fact is publicly available in advance.

The arrival of public information in the U.S. Treasury market sets off a two‐stage adjustment process for prices, trading volume, and bid‐ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.

Using 31 years of data (1990–2020) on U.S. Treasury dealer positions, we find that Treasury issuance is the main driver of dealers’ weekly inventory changes. Such inventory fluctuations are only partially offset in adjacent weeks and not significantly hedged with futures. Dealers are compensated for inventory risk by means of subsequent price appreciation of their holdings. Amid increased balance sheet costs attributable to post-crisis regulatory changes, dealers significantly reduce their position taking and layoff inventory faster. Moreover, the increased participation of non-dealers (investment funds) in the primary market contributes to diminishing compensation for inventory risk taken on at auctions.

The arrival of public information in the U.S. Treasury market sets off a two‐stage adjustment process for prices, trading volume, and bid‐ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.

Repo Market Effects of the Term Securities Lending Facility by Michael J. Fleming, Warren B. Hrung and Frank M. Keane. Published in volume 100, issue 2, pages 591-96 of American Economic Review, May 2010

We examine the financial conditions of dealers that participated in two of the Federal Reserve's lender-of-last-resort (LOLR) facilities—the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF)—that provided liquidity against a range of assets during 2008–2009. Dealers with lower equity returns and greater leverage prior to borrowing from the facilities were more likely to participate in the programs, borrow more, and, in the case of the TSLF, at higher bidding rates. Dealers with less liquid collateral on their balance sheets before the facilities were introduced also tended to borrow more. The results suggest that both financial performance and balance sheet liquidity play a role in LOLR utilization.