Treasury Market Group Warns on High-Frequency Trading Dangers

(Bloomberg) — Wall Street executives finalized recommendations for guiding trading in the U.S. Treasury market to ensure the safety and soundness of the worlds debt arena.

The comments come amid a regulatory push to prevent cheating in financial markets, including the illegal bait-and- switch tactic known as spoofing — which involves submitting orders with no intention of filling them, with the goal of swaying prices in a direction favorable to your strategy.

The Treasury Market Practices Group, an advisory committee backed by the Federal Reserve Bank of New York, published Best Practices recommendations for investors, brokerages and banks in the more than $12.5 trillion market. The release, posted Wednesday on the TMPGs website, follows proposed changes made in April that sought to ensure guidance on preventing manipulative strategies.

The Justice Department has begun an examination of trading in the Treasury market, following the outlines of its successful cases against Wall Streets illegal practices in foreign currencies and other businesses, said three people familiar with the inquiry.

Flash Crash

The updated group recommendation is that market participants who employ trading strategies that involve high- trading volume or quoting activity should be mindful of whether a sudden change in these strategies could adversely affect market liquidity and should seek to avoid changes likely to cause such disruption, the TMPG wrote in a statement. These market participants should have plans in place that would allow them to change participation in a manner that incorporates the impact of the changes on market functioning.

Public scrutiny of Treasury trading has intensified since Oct. 15, when a sudden surge in bond prices drove the biggest drop in yields for 10-year notes since 2009. While theres no evidence the move was driven by manipulation, the event raised concern about investors ability to trade Treasuries in times of financial stress, as tougher capital requirements prompt primary dealers to step back from the market.

Further, market participants should not make sudden changes to trading strategies with the intention to disrupt market liquidity or functioning, the TMPG wrote Wednesday.

The TMPGs guidance is for Treasury and agency debt markets as well as agency mortgage-backed securities. The group also released a final version of a white paper originally published in April titled Automated Trading in the Treasury Markets.