Treasuries Speed Trading Vaporizes Price Gap With Futures

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The ascent of high-speed trading in the past few years has strengthened the correlation between Treasuries and the futures contracts linked to them, according to research from the Federal Reserve Bank of New York.

As much as 20 percent of daily Treasury-market activity now comes from computer-driven orders for securities occurring simultaneously with transactions in the futures market, according to a blog post Wednesday from the New York Fed, which helps implement the central bank’s policy.

The rising use of those strategies, which the researchers call cross-market trading, underscores that advances in technology have allowed speed-trading firms to assume a bigger role in the market as Wall Street dealers step back. The traders’ involvement has helped keep prices of Treasuries and corresponding futures contracts closely correlated, according to the blog.

“Our findings suggest that price discovery takes place on both futures and cash markets and that cross-market trading helps maintain the tight link between the two,” the researchers wrote on the New York Fed’s Liberty Street Economics blog. “From a price discovery view, the two markets can effectively be seen as one.”

While futures, which have a larger and more diverse investor base, often lead the way for price moves in Treasuries, the cash market -- where bonds, notes and bills change hands -- sometimes moves first, the analysts found.

Hodge Podge

The connection between the futures and cash markets demonstrates the need for greater collaboration between regulators to stamp out potential manipulation.

Treasury futures trade on CME Group Inc.’s exchange, which is overseen by the U.S. Commodity Futures Trading Commission, while the cash market is overseen in a hodge-podge fashion by the Treasury Department, the Fed and the Securities and Exchange Commission.

The last time the U.S. government revised regulations for Treasuries trading was the late 1990s, before high-speed traders became dominant.

Wednesday’s blog post was the third in a five-part series on Treasury-market liquidity that the New York Fed is publishing this week.

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