The Treasury Market Practices Group, a group of market experts sponsored by the Federal Reserve Bank of New York, released a consultative white paper on April 9 describing the growth of automated trading in the secondary market for Treasury securities as well as the benefits and risks associated with this trend. The paper also proposed several updates to TMPG's best practices to provide “additional guidance” for firms and trading venues involved with electronic and automated trading.
Simon Potter, the head of the markets group at the New York Fed, explained in an April 13 speech that some of the changes to the best practices have to do with improving governance and back-office processes to keep pace with technological advancements. For example, he said the recommendations include maintaining better change control processes for designing, testing and introducing trading technologies and algorithms.
Potter also said the updated best practices emphasize the importance of avoiding automated trading strategies that create a “false impression” of market price, depth or liquidity. “While the possibility of such trading practices has always existed, electronic trading provides more efficient tools for this type of behavior, and might also give some participants the false impression that it is easier to hide such behavior,” he explained.
The updated best practices also recommend that market participants who represent a material share of daily trading consider the impact on market liquidity before making abrupt changes to automated systems or trading strategies.
