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

Abstract

This paper studies the workup protocol, a distinctive 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, and most of the former’s information value is due to workups expanding volume on the aggressive side. Moreover, we show that workups occur more frequently, but contribute less to price discovery relative to pre-workup trades, around volatile times. We also find that 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 are used more as a channel to encourage liquidity provision, than as a channel to hide private information