Feds: E-trading firms contributed to plunge
New report explains Oct. 15 dip in Treasuries
WASHINGTON An unusual sharp decline in 10-year Treasury yields on Oct. 15 was partly triggered by the growing influence of electronic trading firms in the bond market and a thinner volume of orders that day that exaggerated their role, a government investigation has found.
A 70-page report on the event was released Monday by the Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.
On the morning of Oct. 15, 10year Treasuries plunged 0.16 percentage points in a six-minute span just after 9:30 a.m. ET, then abruptly reversed course in another six-minute window. During the day, Treasuries fell as much as 0.37 percentage points at one point to as low as 1.86% before rallying to close above 2%. Prices, which move in the opposite direction, rose sharply.
Treasuries had dropped that dramatically only on three previous occasions since 1998, and those were sparked by significant policy announcements, government officials said. The event was dubbed a “flash crash” by some analysts, echoing the moniker for a computer-driven stock crash in May 2010.
The volatility on Oct. 15 seems to have been set off partly by a weak retail sales report at 8:30 that morning.
News on the European economy was also disappointing, and the European Central Bank was not signaling that it was poised to respond. Meanwhile, financial firms that had bet on U.S. interest rates rising on a stronger economy were scrambling to unwind those positions as it became clear the Fed would keep rates near zero longer.
But those relatively benign de- velopments quickly led to a flurry of trades that roiled markets. The report finds “no single cause” but cites findings that “help explain the conditions that likely contributed to the volatility.”
The analysis highlights the growth of so-called principal trading firms (PTFs) that use algorithms to trade electronically at high speeds and represented most of the trading volume that day, the report said.
Big banks, meanwhile, also were major players. But as prices rose and yields fell, banks largely pulled back and did not step in with significant purchases. A reduced flow of orders exaggerated the impact of the large orders placed by automated trading firms.
Separately, analysts say banks have played a lesser role in the market in recent years, in part because of more stringent requirements for them to hold reserve capital since the financial crisis. But the report finds no direct link between that development and the market volatility.
It recommends further study of the Treasury market and “continued monitoring of trading and risk-management practices.”
A 70-page report was released Monday by the Treasury Department, the Federal Reserve, the SEC and the Commodity Futures Trading Commission.