Trading Fast and Slow Fuels Turbulence in Treasury Market

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The chasm in the Treasury market between microsecond traders and comparatively slow-poke humans is making it harder to navigate the $12.7 trillion business, according to Tabb Group LLC.

What’s more, it may have helped fueled the extreme volatility on Oct. 15, when Treasury yields plunged and then bounced back, covering a 37-basis-point range in 12 minutes, the research firm said in a report.

The sophistication of Treasury-trading technology varies widely, and different firms trade at vastly different speeds. Wall Street dealers now quote trades to their clients in an average of 1.4 seconds, Tabb said, citing trading-platform Tradeweb. But to find the securities needed to fill those orders, they are buying and selling Treasuries on lightning-quick platforms like ICAP Plc’s BrokerTec and Nasdaq OMX Group Inc.’s eSpeed, where more than 50 percent of the transacting is done by fast-moving firms.

“Market participants are moving at varying speeds,” and “volatility is going to be a product of that evolution,” Anthony Perrotta, Tabb’s global head of research and consulting, said by phone.

That trend, paired with government-imposed capital requirements, has exacerbated sharp swings in the market for U.S. debt, according to Tabb and interest-rate executives at Wall Street banks. The underpinnings of the Treasury market, which falls under the purview of a patchwork assortment of regulators, came into the spotlight after whirlwind trading on Oct. 15. Intraday changes of greater magnitude have only happened on three occasions since 1998, and unlike October’s movement, were driven by significant policy announcements.

Liquidity Crunch

The role of facilitating trading, known as market making, is being done more and more by a small group of high-speed trading firms, according to Tabb, echoing a July 13 report on Treasury market volatility from U.S. authorities.

Even with new liquidity providers emerging, regulations put into place to keep financial firms from taking the types of risks that precipitated the 2008 crisis continue to foster a liquidity crunch, according to Perrotta.

Banks including Barclays Plc say the U.S. could be paying more to borrow as a result.

Banks “have no interest in providing liquidity” anymore, Perrotta said.

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