<p><em>(As requested in comments)</em></p>
<p>Primary dealers have a privileged position, so there is value in being registered as a primary dealer.</p>
<p>The Treasury or Central Bank can impose standards of behaviour (e.g. an expectation of reasonable participation in all bond auctions or open market operations) as a condition of maintaining that registration. There are rules such as <a href="https://www.newyorkfed.org/markets/pridealers_policies.html" rel="nofollow noreferrer">https://www.newyorkfed.org/markets/pridealers_policies.html</a> and you will find sections such as</p>
<blockquote>
<p>The New York Fed expects a primary dealer to:</p>
<ul>
<li><p>participate consistently as counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the FOMC;</p>
</li>
<li><p>provide the New York Fed’s trading desk with market commentary and market information and analysis helpful in the formulation and implementation of monetary policy;</p>
</li>
<li><p>participate in all auctions of U.S. government debt; and</p>
</li>
<li><p>make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account holders.</p>
</li>
</ul>
<p>In the selection process, the New York Fed will evaluate a prospective primary dealer with these expectations in mind.</p>
</blockquote>
<p>In effect primary dealers provide liquidity and information and markets even at times of crisis, which comes at a cost, one which countries such as the USA think is worth paying to get the increased financial stability it brings.</p>

CC BY-SA 3.0
2016-09-17T17:05:05.857Z
2016-09-17T17:05:05.857Z
2020-06-17T09:40:54.643Z
Henry
<p>When the treasury or equivalent institution of a country auctions of government bonds there is frequently (i.e. in most countries) some sort of restriction on who can participate. The term <a href="https://en.wikipedia.org/wiki/Primary_dealer" rel="nofollow">primary dealers</a> refers to agents who participate in this primary auction with the intent of reselling the acquired bonds on the secondary market. Usually there is a gap between the bond price (or implied interest rate) of the primary and the secondary market so this is profitable.</p>

<p>Some papers on the phenomenon:</p>

<ul>
<li><a href="https://www.jstor.org/stable/23357234?seq=1#page_scan_tab_contents" rel="nofollow">VALUING DEALERS' INFORMATIONAL ADVANTAGE: A STUDY OF CANADIAN TREASURY AUCTIONS</a> (JStor access needed)</li>
<li><a href="https://core.ac.uk/download/pdf/6592976.pdf" rel="nofollow">Who Buys Treasury Securities at Auction</a></li>
</ul>

<p>What benefit if any does the treasury derive from this setup, i.e. restricting auction access?</p>

CC BY-SA 3.0
2016-09-17T11:57:44.883Z
If the primary dealers have a privileged position, then there is value in being registered as a primary dealer, and so the Treasury or Central Bank can impose standards of behaviour (e.g. an expectation of reasonable participation in all bond auctions or open market operations) as a condition of maintaining that registration
Henry
CC BY-SA 3.0
2016-09-17T12:02:32.253Z
@Henry How would this 'expectation' manifest itself and what benefit is it to the treasury? I am happy to participate in any auction as long as I can bid 0. There is definitely value to being registered as a primary dealer. This is the basis of my question.
Giskard
CC BY-SA 3.0
2016-09-17T12:25:29.210Z
If you bid $0$, I would probably not regard that as "reasonable participation".  So you would not stay on my list.  Since it is my list, I apply my discretion, and you could lose your privilege.
Henry
CC BY-SA 3.0
2016-09-17T12:41:53.693Z
@Henry Okay. So is there a manifestation of these rules for staying on the list, are the rules written down somewhere? Unfortunately otherwise this seems very vague. (Not to mention speculative.)
Giskard
CC BY-SA 3.0
2016-09-17T12:44:48.657Z
@Henry And even if we allow for what are practically kickbacks to the Treasury it is not clear that current setup creates a higher payoff for the Treasury and the primary dealers combined than a non-restrictive auction would. If it does not then no amount of kickbacks that the primary dealers are willing to give can be sufficient to compensate the Treasury.
Giskard
CC BY-SA 3.0
2016-09-17T15:22:16.650Z
There are rules such as https://www.newyorkfed.org/markets/pridealers_policies.html though you will find words like "reasonable" in them.  In effect primary dealers provide liquidity and information and markets even at times of crisis, which comes at a cost, one which countries such as the USA think is worth paying to get the increased financial stability it brings.
Henry
CC BY-SA 3.0
2016-09-17T16:54:16.967Z
@Henry If you posted this link and a short summary as an answer I would upvote it.
Giskard
<government-debt><auctions>
Primary dealers in treasury auctions
Giskard
# Primary dealers in treasury auctions

(Asked by: username_0 on 2016-09-17)

When the treasury or equivalent institution of a country auctions of government bonds there is frequently (i.e. in most countries) some sort of restriction on who can participate. The term [primary dealers](https://en.wikipedia.org/wiki/Primary_dealer) refers to agents who participate in this primary auction with the intent of reselling the acquired bonds on the secondary market. Usually there is a gap between the bond price (or implied interest rate) of the primary and the secondary market so this is profitable.

Some papers on the phenomenon:

* [VALUING DEALERS' INFORMATIONAL ADVANTAGE: A STUDY OF CANADIAN TREASURY AUCTIONS](https://www.jstor.org/stable/23357234?seq=1#page_scan_tab_contents) (JStor access needed)
* [Who Buys Treasury Securities at Auction](https://core.ac.uk/download/pdf/6592976.pdf)

What benefit if any does the treasury derive from this setup, i.e. restricting auction access?

**Tags:** government-debt, auctions
> **Comments:**
> **username_1**: If the primary dealers have a privileged position, then there is value in being registered as a primary dealer, and so the Treasury or Central Bank can impose standards of behaviour (e.g. an expectation of reasonable participation in all bond auctions or open market operations) as a condition of maintaining that registration  
> **username_0**: @Henry How would this 'expectation' manifest itself and what benefit is it to the treasury? I am happy to participate in any auction as long as I can bid 0. There is definitely value to being registered as a primary dealer. This is the basis of my question.  
> **username_1**: If you bid $0$, I would probably not regard that as "reasonable participation".  So you would not stay on my list.  Since it is my list, I apply my discretion, and you could lose your privilege.  
> **username_0**: @Henry Okay. So is there a manifestation of these rules for staying on the list, are the rules written down somewhere? Unfortunately otherwise this seems very vague. (Not to mention speculative.)  
> **username_0**: @Henry And even if we allow for what are practically kickbacks to the Treasury it is not clear that current setup creates a higher payoff for the Treasury and the primary dealers combined than a non-restrictive auction would. If it does not then no amount of kickbacks that the primary dealers are willing to give can be sufficient to compensate the Treasury.  
> **username_1**: There are rules such as https://www.newyorkfed.org/markets/pridealers_policies.html though you will find words like "reasonable" in them.  In effect primary dealers provide liquidity and information and markets even at times of crisis, which comes at a cost, one which countries such as the USA think is worth paying to get the increased financial stability it brings.  
> **username_0**: @Henry If you posted this link and a short summary as an answer I would upvote it.  

---

## 1 answers

### Answer by username_1 on 2016-09-17. Score: 2 | Accepted answer

*(As requested in comments)*

Primary dealers have a privileged position, so there is value in being registered as a primary dealer.

The Treasury or Central Bank can impose standards of behaviour (e.g. an expectation of reasonable participation in all bond auctions or open market operations) as a condition of maintaining that registration. There are rules such as <https://www.newyorkfed.org/markets/pridealers_policies.html> and you will find sections such as

> The New York Fed expects a primary dealer to:
>
> * participate consistently as counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the FOMC;
> * provide the New York Fed’s trading desk with market commentary and market information and analysis helpful in the formulation and implementation of monetary policy;
> * participate in all auctions of U.S. government debt; and
> * make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account holders.
>
> In the selection process, the New York Fed will evaluate a prospective primary dealer with these expectations in mind.

In effect primary dealers provide liquidity and information and markets even at times of crisis, which comes at a cost, one which countries such as the USA think is worth paying to get the increased financial stability it brings.


---

