Order Flow Segmentation and the Role of Dark Trading in the Price Discovery of U.S. Treasury Securities

Abstract

This paper studies the workup protocol, a unique trading feature in the U.S. Treasury securities market that resembles a mechanism for discovering dark liquidity. We quantify its role in the price formation process in a model of the dynamics of price and segmented order flow induced by the protocol. We find that the dark liquidity pool generally contains less information than its transparent counterpart, but that its role is not trivial. We also show that workups are used more often around volatile times, but that their information role becomes relatively less important at those times compared to that of pre-workup trades. Higher usage of workups is also associated with higher market depth, lower bid-ask spreads, and higher trading intensity. Collectively, the evidence suggests that workups tend to be used more as a channel for liquidity providers to guard against adverse price movements than as a channel to hide private information.