Automation versus Intermediation: Evidence from Treasuries Going Off the Run





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    • Simon School of Business, University of Rochester, Haas School of Business, University of California, Berkeley, and Forensic Economics, Inc., respectively. We thank Bruno Biais, Ken Garbade, Charles Jones, Rich Lyons, Haim Mendelson, Christine Parlour, Tunay Tunca, and seminar participants at the University of Rochester, the University of Washington, Stanford University, the 2004 NBER Market Microstructure meetings, the 2004 Workshop on Information Systems and Economics, and the 2004 MTS Conference on Financial Markets for helpful comments and suggestions. We are especially grateful to Michael Fleming for sharing numerous insights on the Treasury market. Hendershott gratefully acknowledges support from the National Science Foundation.


This paper examines the choice of trading venue by dealers in U.S. Treasury securities to determine when services provided by human intermediaries are difficult to replicate in fully automated trading systems. When Treasury securities go “off the run” their trading volume drops by more than 90%. This decline in trading volume allows us to test whether intermediaries' knowledge of the market and its participants can uncover hidden liquidity and facilitate better matching of customer orders in less active markets. Consistent with this hypothesis, the market share of electronic intermediaries falls from 81% to 12% when securities go off the run.