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

Published online by Cambridge University Press:  20 April 2012

Albert J. Menkveld ,
Asani Sarkar  and
Michel van der Wel
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Abstract

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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 4 , August 2012 , pp. 821 - 849
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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