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Clients' Connections: Measuring the Role of Private Information in Decentralised Markets

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  • Kondor, Péter
  • Pinter, Gabor

Abstract

We propose a new measure of private information in decentralised markets -- connections -- defined as the number of dealers with whom a client trades in a time period. Using proprietary data for the UK government bond market, we show that clients have systematically better performance when having more connections, and this effect is stronger during macroeconomic announcements. Time-variation in market-wide connections also helps explain yield dynamics. Given our novel measure, we present two applications suggesting that (i) dealers pass on information, acquired from their informed clients, to their subsidiaries, and (ii) informed clients better predict the order-flow intermediated by their dealers.

Suggested Citation

  • Kondor, Péter & Pinter, Gabor, 2019. "Clients' Connections: Measuring the Role of Private Information in Decentralised Markets," CEPR Discussion Papers 13880, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13880
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    Cited by:

    1. Jason Allen & Ali Hortaçsu & Eric Richert & Milena Wittwer, 2024. "Entry and Exit in Treasury Auctions," Staff Working Papers 24-29, Bank of Canada.
    2. Czech, Robert & Huang, Shiyang & Lou, Dong & Wang, Tianyu, 2021. "Informed trading in government bond markets," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1253-1274.
    3. Jason Allen & Milena Wittwer, 2023. "Centralizing Over-the-Counter Markets?," Journal of Political Economy, University of Chicago Press, vol. 131(12), pages 3310-3351.
    4. Gabor Pinter & Chaojun Wang & Junyuan Zou, 2024. "Size Discount and Size Penalty: Trading Costs in Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 37(7), pages 2156-2190.
    5. Péter Kondor & Gábor Pintér, 2022. "Clients' Connections: Measuring the Role of Private Information in Decentralized Markets," Journal of Finance, American Finance Association, vol. 77(1), pages 505-544, February.
    6. Pinter, Gabor & Uslu, Semih, 2022. "Comparing search and intermediation frictions across markets," Bank of England working papers 974, Bank of England.
    7. Pintér, Gábor & Wang, Chaojun & Zou, Junyuan, 2022. "Information chasing versus adverse selection," Bank of England working papers 971, Bank of England.
    8. Di Gangi, Domenico & Lazarov, Vladimir & Mankodi, Aakash & Silvestri, Laura, 2022. "Links between government bond and futures markets: dealer-client relationships and price discovery in the UK," Bank of England working papers 991, Bank of England.
    9. Czech, Robert & Pintér, Gábor, 2020. "Informed trading and the dynamics of client-dealer connections in corporate bond markets," Bank of England working papers 895, Bank of England, revised 20 Jan 2022.
    10. Chao Ying, 2020. "The Pre-FOMC Announcement Drift and Private Information: Kyle Meets Macro-Finance," 2020 Papers pyi149, Job Market Papers.
    11. Bidder, Rhys & Coen, Jamie & Lepore, Caterina & Silvestri, Laura, 2024. "Whose asset sales matter?," Bank of England working papers 1088, Bank of England.
    12. Di Maggio, Marco & Franzoni, Francesco & Massa, Massimo & Tubaldi, Roberto, 2024. "Strategic trading as a response to short sellers," Journal of Financial Markets, Elsevier, vol. 69(C).
    13. Simon Jurkatis & Andreas Schrimpf & Karamfil Todorov & Nicholas Vause, 2023. "Relationship discounts incorporate bond trading," BIS Working Papers 1140, Bank for International Settlements.
    14. Lou, Dong, 2020. "Informed Trading in Government Bond Markets," CEPR Discussion Papers 15028, C.E.P.R. Discussion Papers.
    15. Barria, Rodrigo & Pinter, Gabor, 2023. "Mispricing in inflation markets," Bank of England working papers 1034, Bank of England.

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    More about this item

    Keywords

    Private information; Client-dealer connections; Government bond market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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