Review: Price Discovery in the U.S. Treasury Cash Market

This is the third post in my series of reviews of academic papers written in the last year about the market structure of the US Treasury market. As the most important fixed income market it is great to see so much discussion around the topic of market structure. This post is a review and commentary on:

Harkrader, James Collin, and Michael Puglia (2020). “Price Discovery in the U.S. Treasury Cash Market: On Principal Trading Firms and Dealers,” Finance and Economics Discussion Series 2020-096. Washington: Board of Governors of the Federal Reserve System,

DISCLAIMER: The opinions expressed here are mine and mine alone. They are not associated with any employer of mine or organization I am associated with.

That paper does a deep dive into the interaction between Dealers and Principal Trading Firms (PTF) on the BrokerTec all-to-all “CLOB” during the period from April 2019 through May 2020 which includes the highly volatile events of March 2020. The analysis looks at the price impact from trades across all combinations of when Dealers, PTFs or multiple participants were on the passive or aggressive side of the trades.

This paper shows the benefit of the inclusion of US Treasury data into TRACE as a robust source of factual information for the public sector to explore topics and make informed decisions. Credit to all those involved that made the collection and reporting of US Treasury trade level data a reality, it will pay long lasting dividends.

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