High-Frequency Firms Align With Regulators on Bond Transparency

  • Information would help tailor algorithmic trading strategies
  • Regulators assess HFTs' contribution to market volatility

High-frequency traders and U.S. regulators may make strange bedfellows, yet both are calling for more light to shine on trading in the $12.9 trillion Treasuries market.

Since the market’s harrowing swing on Oct. 15, 2014, officials from the Federal Reserve to the Treasury Department have said the world’s fastest traders may have exacerbated such volatility. These firms counter that their market-making helped contain the events of that day, when yields plunged by a near-record amount and then rebounded to complete the biggest round-trip in a quarter century. Both sides agree that they want more data about a market in which a growing share of transactions is happening behind closed doors.

“It took an event like Oct. 15 to shine a light on some of the issues in the Treasury market,” said John Shay, senior vice president of global markets at New York-based Virtu Financial Inc., one of the world’s biggest electronic market-making firms. “We see Treasuries as a real growth area for us, but a lot of work still needs to be done to get this market on a more secure footing”

With about $500 billion in Treasuries changing hands each day, HFT firms say more access to data about which specific securities are trading and when would give investors and regulators a better sense of how much is available at any particular time. The companies acknowledge it would help their business as well, offering more information to build and fine-tune the quantitative models that drive their strategies.

Unobtainable Data

“When you talk about transparency, you’re really talking about information," said James Angel, associate professor of finance at Georgetown University in Washington. “Everybody wants a level playing field that’s tilted in their direction.”

Traders who use computer algorithms account for at least half the transactions on electronic platforms, and are expected this year to surpass dealers in market-making in Treasuries on systems such as ICAP Plc’s BrokerTec and Nasdaq OMX Group Inc.’s eSpeed, research firm Tabb Group said in a July report. 

Yet obtaining price data on all transactions through these mediums is costly and often difficult or even impossible, some of the computer-driven trading firms say. Adding to the issue is the trading that takes place privately between dealers and clients, for which such statistics are unobtainable.

More Clarity

“The government mandates massive transparency in stocks and a high degree of transparency in corporate and municipal bonds, and not in government debt,” said Adam Nunes, head of business development at New York-based Hudson River Trading LLC, a high-frequency trading firm and parent company of Rigel Cove, among the leading electronic market-makers in Treasuries. “Adding transparency makes prices more informed and more efficient, and we don’t have it in the Treasury market.”

Fewer than half of the Fed’s 22 primary dealers in a Greenwich Associates survey this month said they’re actively making markets on inter-dealer platforms anymore.

Electronic trading firm KCG Holdings Inc., which has been active in the Treasury market, says it trades one-on-one with traditional bond dealers, which offers clarity since one group is accountable for how orders get filled.

Illiquidity Bouts

"Measuring data and using that data to value liquidity, historically, was never really done, especially compared to other asset classes,” said Samantha Coyne, who oversees sales for KCG’s client market-making business. ‘‘There’s definitely more interest out there."

Researchers at the New York Fed pointed out that bouts of illiquidity have increased, making it more challenging for investors trading government securities during times of stress. By one measure, outsize price swings are occurring almost twice as often as statisticians would normally expect, according to data compiled by TD Securities.

Antonio Weiss, a counselor to Treasury Secretary Jacob J. Lew, is leading the government’s push to assess what data are needed.

"Put simply, we cannot get the information we need to analyze risk across Treasury markets in anything that approaches real time, and that has to change," he said in an Aug. 3 speech at The Brookings Institution.

Weiss, along with Fed Governor Jerome Powell, is leading a conference on bond-market liquidity next week at the New York Fed.

Joint Report

Securities & Exchange Commissioner Luis Aguilar recommended this year that electronic Treasuries trading come under SEC rules designed for brokers and exchanges that trade stocks and corporate debt.

The five agencies that released a joint report on last October’s volatility said they would assess the sufficiency of publicly available information on Treasury cash securities and review possible reporting. The agencies also said they would support efforts to enhance public reporting on Treasury trading venues’ policies.

HFTs see the call for transparency as a way to bring Treasuries in line with longtime stock-market standards dating back to ticker-tape.

“There is no consolidated tape for Treasuries,” said Nunes at Hudson River.

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