Journal of Financial and Quantitative Analysis

Research Articles

Customer Order Flow, Intermediaries, and Discovery of the Equilibrium Risk-Free Rate

Albert J. Menkveld, Asani Sarkar and Michel van der Wel, TI Duisenberg School of Finance, VU University Amsterdam, De Boelelaan 1105, 1081 HV, Amsterdam, The Netherlands, Federal Reserve Bank of New York, 33 Liberty St, New York, NY 10045, and Princeton University, Tinbergen Institute, Erasmus University Rotterdam, PO Box 1738, 3000 DR Rotterdam, The Netherlands, and CREATES Aarhus, Denmark


Macro announcements change the equilibrium risk-free rate. We find that Treasury prices reflect part of the impact instantaneously, but intermediaries rely on their customer order flow after the announcement to discover the full impact. This customer flow informativeness is strongest when analyst macro forecasts are most dispersed. The result holds for 30-year Treasury futures trading in both electronic and open-outcry markets. We further show that intermediaries benefit from privately recognizing informed customer flow, as their own-account trading profitability correlates with customer order access.


  We are grateful for comments from Soehnke Bartram, Hendrik Bessembinder (the editor), Darrell Duffie, Michael Fleming, Thierry Foucault, Clifton Green, Terrence Hendershott, Charles Jones, Richard Lyons, Grant McQueen (the referee), Robert Schwartz, and participants at the 2006 Microstructure of Equity and FX Markets conference in Ottawa, the 2006 International Conference on High Frequency Finance in Konstanz, the Merton H. Miller doctoral seminar at the 2007 Financial Management Association meeting, the 2007 European Finance Association annual meeting, the 2008 Industrial Organisation of Securities Markets conference in Frankfurt, and seminars at the NY-Fed, Mannheim University, and the Swedish Institute of Financial Research. We are grateful to the Netherlands Organization for Scientific Research (NWO) for a VENI grant and travel support. Van der Wel acknowledges support from CREATES, funded by the Danish National Research Foundation. The views stated here are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. We are responsible for all errors.