(Bloomberg) —U.S. officials have concluded that high- frequency trading contributed to theTreasurymarkets wild ride last October, a finding that will probably add to regulatory scrutiny of the industry.
While a soon-to-be-published government report wont point to just one cause, it will cite speed traders as playing a key role, according to a person with direct knowledge of the study.Treasuryyields plunged the most in five years on Oct. 15, 2014, before recovering, fueling a months-long debate over whether something has fundamentally changed in a $12.7 trillion market that most investors consider a safe haven.
One alteration is that almost half the trading in Treasuries is now electronic, according to a 2014 survey from financial research firm Greenwich Associates.TreasurySecretary Jacob J. Lew is among U.S. officials whove drawn a link between traders using computers to buy and sell securities at lightning- fast speeds, and changes in volatility and liquidity.
Last week, Lew saidTreasurywould soon release a study into what caused last Octobers fluctuations. That report, which the Federal Reserve, the U.S. Securities and Exchange Commission and other agencies also contributed to, will be published Monday, according to two people familiar with the matter who asked not to be named because they werent authorized to discuss it publicly.
Treasuryspokesman Adam Hodge declined to comment.
Large Trades
Some traders have complained that it has become harder to move large blocks of Treasuries in recent years without moving prices, a claim that is backed up by data from Wall Street banks. As of last fall, the amount of U.S. debt that could be traded in a single transaction without affecting prices had dropped by 48 percent since the 2008 financial crisis, according to JPMorgan Chase & Co.
High-frequency trading firms are among the factors driving markets toward smaller trade sizes, according toTreasuryofficial Antonio Weiss, a counselor to Lew. These firms are playing a much bigger role as market intermediaries, replacing banks and brokers that pulled back after suffering losses during the crisis, Weiss wrote Monday in a Wall Street Journal opinion piece.
In previewing the report July 8, Lew said one factor that didnt trigger the October volatility for Treasuries was rules implemented under the 2010 Dodd-Frank Act.
The role of regulations, including a ban on banks making market bets with their own capital and measures that encourage lenders to hold assets considered low risk, has been hotly debated.
Rules Debate
JPMorgan Chief Executive Officer Jamie Dimon is among bankers who have raised concerns that there is a lack of liquidity inTreasurymarkets and that what happened in October should serve as a warning shot to investors. Blackstone Group LP CEO Stephen Schwarzman has gone further, saying new regulations may fuel the next financial crisis.
While Fed officials concede Dodd-Frank has probably had some effect on price swings, theyve joined Lew in flagging high-frequency trading as an important factor.
The strategy typically involves using ultra-fast technology and placing computer servers close to exchanges to react to market data as quickly as possible. Such trading has drawn increased attention from regulators since the May 2010 flash crash, when $1 trillion of value was briefly erased from U.S. stocks.
Their trading patterns are different, Fed Governor Lael Brainard said last week at an event in Washington. As they take a preponderance of the trading activity in some markets, that no doubt also may change the patterns of liquidity resilience.
