Manipulation in the Treasury Auction Market

Abstract

This paper analyzes the market manipulation in the Treasury auction market. There exist manipulation strategies for informed manipulation in both discriminatory auction (DA) and uniform price auction (UPA) in equilibrium. The manipulation extent is positively correlated with the potential manipulator's expected payoff, but negatively correlated with the manipulated and the social expected payoff, which implies that the market manipulation should be prohibited. The UPA seems to be more effective to prevent the market manipulation than the DA, while, the DA generates the least as much revenue for Treasury as does the UPA in most cases. This leads to the Treasury Auction Paradox, which gives another view on the Milton Friedman's Proposal. The paradox is solved as for the uninformed manipulation, which provides strong proofs for the existent of DA for Treasury in many countries. The results also provide some predictions for the information content of the price in the when-issued market. When there is no informed participants, there will exist no manipulation strategy in equilibrium in either DA or UPA.