Requests to Trade Went Unanswered During 2014 Bond Flash Move

  • In Treasury-market tumult, dealers stepped back from screens
  • Dealers didn't answer about 18% of client electronic requests

Primary dealers didn’t respond to a larger-than normal share of investors’ electronic requests to trade during the Oct. 15, 2014, flash rally in Treasuries, according to data from the Federal Reserve Bank of New York.

Dealers didn’t answer roughly 18 percent of the requests that came through that day on electronic platforms they use to transact with clients, versus around 4 percent on a normal day, according to a report released Monday by the New York Fed. On other days where there were market-moving events, that proportion was about 8 or 9 percent. The report, which was first presented at a conference at the New York Fed last month, also indicated the quick swing didn’t originate in the market where dealers trade with their clients.

"These results are of a piece with the ones from the broader study," said Craig Pirrong, a finance professor at the University of Houston. "There is some indication that market-makers" that trade directly with investors "were not as accommodating during this time."

The study is the latest effort to understand the market swings of last October, when Treasury 10-year yields plunged by 16 basis points before rebounding. While the review didn’t find any outsize trades that sparked the move, it did shine light on the $278-billion-per-day market where dealers trade with clients away from central platforms. That arena had been left out of the analysis until now. A Joint Staff Report released in July by U.S. authorities included only data from interdealer markets, where a smaller share -- $201 billion on average -- has traded each day this year.

‘Perfectly Understandable’

The analysis also found that the tumult prompted dealers to provide quotes that were further than usual from the best prices available. Nearly 12 percent of quotes were more than three pricing increments from the best available figure, according to the presentation. On normal days, about 4 percent of the quotes offered fell within that range, with the figure rising to nearly 10 percent on days with market-moving events.

"That’s typical market-maker behavior," said Pirrong, and "perfectly understandable given the circumstances."

According to the analysts’ estimates, the share of trading done by phone call between dealers and clients "declined slightly" on Oct. 15, 2014, but voice trading "remains an important mode of trading" between dealers and clients.

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