High-frequency trading in the US government bond market carries risks that threaten the ability of the market to function as well as the ability of investors to fairly value assets, two government officials said on Monday. The impact of high frequency trading has come under increased scrutiny since the “flash crash” last October, in which US Treasuries registered wild price swings in just a 12-minute period.
Critics of high-frequency trading, a computerized strategy that can move billions of dollars in fractions of a second, blame it for causing excessive price swings in the bond market, which is already facing a decline in liquidity.
Federal Reserve Governor Jerome Powell acknowledged the innovation that high frequency trading has brought to the bond market, but he questioned how investors could value the long-term value of a bond or any asset.
“If trading is at nanoseconds, there won’t be a lot of ‘fundamental’ news to trade on or much time to formulate views about the long-run value of an asset; instead, trading at these speeds can become a game played against order books and the market rules,” Powell said, speaking on a panel at a conference on US bond market structure sponsored by the Brookings Institute.
PRESSURE
Antonio Weiss, counselor to the US Treasury secretary, was blunter.
“The constant pursuit to save one more millisecond not only consumes resources potentially better invested elsewhere, but increases the pressure on the plumbing of the system to handle ever-increasing speeds and messaging traffic,” he said in a speech prepared for delivery to the panel.
The impact of high frequency trading on the $12.5 trillion Treasuries market was profound last Oct. 15, with many questions still unanswered.
On that day, the trading volume of US Treasuries exploded in a matter of 12 minutes. Benchmark 10-year Treasuries yields swung in a 37-basis-point range during that period, only to end 6 basis points lower on the day, according to a report released in July by the Treasury, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission
The report said companies that engage in algorithmic trading, or Principal Trading Firms, accounted for 70 to 75% of total trading in both the cash and futures markets, up from about 50% on “normal” days.
Weiss said high frequency trading “is, quite simply, a disruptive technological innovation, which has reshaped an entire industry structure.”
Weiss and Powell said the changing bond market structure stemming from the growing role of high frequency trading warrants more examination.
“Is the race for speed helping or hurting market function?” Weiss said.
-- Reuters
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