U.S. regulatory agencies issued a joint report in July on their analysis of an extraordinary wave of trading in the Treasury market on Oct. 15. On that day, the prices of Treasury bonds and Treasury futures made a very large swing in just 12 minutes, with no obvious catalyst, prompting widespread concern about the potential for further volatility.
The report identified several factors that contributed to the volatility, including changes in global risk sentiment and investor positions, a decline in order book depth, and changes in order flow and liquidity provision.
The report also highlighted several longer-term changes to the structure of the U.S. Treasury market and the implications for the availability of liquidity. These changes include the emergence of principal trading firms as a significant source of liquidity and trading volume in the Treasury market. In particular, the report found that principal trading firms accounted for “the vast majority of market depth” in the electronic order books for benchmark “on the run” Treasury securities and Treasury futures.
Going forward, the report recommended continued analysis of Treasury market structure and functioning, focusing on trading and risk management practices, the availability of public data and strengthening monitoring and inter-agency coordination related to trading across the Treasury cash and futures markets.
The report was drafted by staff from the U.S. Treasury Department, the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The FIA Principal Traders Group issued a statement in response to the report, praising the regulators for taking a data-driven approach to analyzing market behavior and for recognizing the role of principal traders in providing liquidity.
