What Is a Direct Bidder?

A direct bidder is an entity or individual that purchases Treasury securities at auction for a house account rather than on behalf of another party.

Key Takeaways

  • A direct bidder is an entity or individual that purchases Treasury securities at auction for a house account rather than on behalf of another party.
  • Direct bidders include primary dealers, non-primary dealers, hedge funds, pension funds, mutual funds, insurers, banks, governments, and individuals.
  • Direct bidders can be either competitive bidders or noncompetitive bidders, each with their own rules.
  • Competitive bids require the direct bidder to specify the desired return while a noncompetitive bid does not require the bidder to indicate the desired return.
  • Noncompetitive bidders can bid between $100 and $5 million in increments of $100.
  • The online systems used for bidding are Treasury Automated Auction Processing System (TAAPS), Treasury Direct, and Legacy Treasury Direct.

Understanding a Direct Bidder

When an individual or entity buys for their own account as opposed to buying for someone else, that individual or entity is a direct bidder. Direct bidders include primary dealers, non-primary dealers, hedge funds, pension funds, mutual funds, insurers, banks, governments, and individuals. 

Each U.S. Treasury bill, note, bond, floating-rate note (FRN), or Treasury inflation-protected security (TIPS) is sold at a public auction. The Treasury Department has permitted direct bidding on securities, both competitively and noncompetitively, since auctions first came into use.

Bidding Process

Competitive bids require the direct bidder to specify the desired return, with the number of securities won at auction depending on the highest competitive discount rate. A noncompetitive bid does not require the bidder to indicate the desired return. Noncompetitive bids can only be $5 million or less. The Treasury accepts all noncompetitive bids, and then competitive bids in order of increasing yield.

Bidders can place their bids over specified systems that are made available to those parties interested in purchasing at auction. Institutional bidders use the Treasury Automated Auction Processing System (TAAPS). TAAPS accepts both competitive and noncompetitive bids. Real bidders, which are primarily individuals, can use Treasury Direct and Legacy Treasury Direct. These two systems only accept noncompetitive bids.

After an auction has ended, the Treasury Department announces the dollar amount of securities purchased by primary dealers and other direct bidders, as well as indirect bidders. This information includes the amount purchased by each group. All successful bidders are awarded securities at the same price, which is the price that corresponds to the highest rate, yield, or discount margin of the competitive bids accepted.

Primary dealers purchase debt directly from the Treasury and re-sell it to their clients at a predetermined price. For years, primary dealers comprised the majority of the participation in auctions but their dominance has been declining for years.

Requirements and Limitations of a Direct Bidder

To participate in a Treasury auction, an entity or individual must simply submit a tender with a bid for the security they would like to purchase. Participants can bid either noncompetitively or competitively, but not both ways in the same auction.

Noncompetitive bidders are permitted to bid between $100 and $5 million in $100 increments. Competitive bidders can bid with more than one competitive bid, however, the Treasury does not allow for bids that are at a rate or yield greater than 35% of the offering amount.

The Treasury has allowed direct bidding for as long as it has conducted security auctions. Any entity or individual may bid directly as long as the entity or individual has made all the necessary arrangements for access to the specific systems and has made proper arrangements for delivery and payment for auction awards.

For institutions, payment is usually made by debiting the bidder's account at the Federal Reserve or through a clearing bank if there is no account at the Federal Reserve. For retail bidders, payment is debited from their bank account.

If organizations shift from bidding through primary dealers, referred to as indirect bidding, to bidding directly themselves, it can be more difficult for other primary dealers to gauge the level of interest in securities auctions.

Banks that serve as primary dealers were named in a 2017 lawsuit alleging that they conspired to share information on customer orders in order to rig Treasury auctions in their favor.