Abstract
The use of order flow information by financial firms has come to the forefront of the regulatory debate. A central question is: Should a dealer who acquires information by taking client orders be allowed to use or share that information? We explore how information sharing affects dealers, clients and issuer revenues in U.S. Treasury auctions. Because one cannot observe alternative information regimes, we build a model, calibrate it to auction results data, and use it to quantify counter-factuals. The model's key force is that sharing information reduces uncertainty about future value. With less uncertainty, risk-averse bidders bid more. We estimate that yearly auction revenues would be $2.4 billion higher with full-information sharing between clients and dealers. For investors, the welfare effects of information sharing depend on how information is shared and whether it increases or decreases asymmetry. The model shows that investors can benefit when dealers share information with each other, not when they share more with clients.