Informational Advantage and Information Structure: An Analysis of Canadian Treasury Auctions

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, i.e. the distribution of competing bids in the auction, and (ii) fundamentals, i.e. 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. In the language of auction theory, our data is therefore consistent with the private value paradigm. We find that the “information about competition” contained in customer bids accounts for 13−35% of dealers’ expected surplus.