U.S. government regulators puzzling over what to do about frugalities in the increasingly electronic bond markets said on Tuesday reforms may be needed that emphasize stability over what one called the "never-ending competition for more speed."
Following an unexplained so-called flash rally in the U.S. Treasuries market on Oct. 15, 2014 that saw volatile swings in bond prices, regulators have ramped up scrutiny of the changing structure of the nearly $13-trillion Treasuries market.
At the same time, some investors and traders are concerned that such significant disruptions will become more frequent in the market for what is considered the world's safest securities. A report on last year's market shock cited the increasing prominence of algorithmic strategies in high-frequency trading, which can move billions of dollars of transactions within fractions of a second.
Jerome Powell, the Federal Reserve governor leading the U.S. central bank's approach, said the current Treasuries market structure rewards firms that engage in such hyper-swift trading.
"There may be adaptations of this market structure that could give greater emphasis to liquidity provision rather than a never-ending competition for more speed," Powell said at a two-day conference at the New York Fed. He cited frequent "batch" auctions and minimum life-spans on orders as possible changes.
Securities and Exchange Commission Chair Mary Jo White, speaking later, said the bond market could borrow a page from the smaller and even more electronic U.S. equity market, where brokers and exchanges have adopted automatic trading halts and other safety valves.
In a redux of the debate that gripped stock markets five years ago, proponents of "algo" trading in bond markets have said its growth has improved price discovery and efficiency, while critics have blamed it for increased market volatility.
Antonio Weiss, counselor to the Treasury secretary, stressed that regulators were in the early stages of their first large-scale review of the Treasury market structure since 1998.
"But the growth of algorithmic, high-speed trading has increased operational risk, and heightened the need for comprehensive oversight and risk management practices," he told the gathering of traders and bankers.
Weiss said episodes of volatility such as the one on Oct. 15, 2014, "can be magnified or accelerated by the interaction at high speeds of automated trading strategies and a complex array of trading rules, venues and products."
The report on the October 2014 flash rally did not propose specific rule changes. It was published in July by the Fed, the Treasury, the SEC, and the Commodity Futures Trading Commission.
The SEC's White said there are similarities between the wild stocks swing on Wall Street on May 6, 2010 - known as the "flash crash" - and what rattled Treasuries just over a year ago.
Since then, the SEC has installed circuit-breakers and anti-disruptive rules to calm extreme price swings in stock markets. Regulators looking to reform the bond market might want to explore tighter oversight on algorithmic trading and firms that engage in this strategy, and also consider rules on more transparency for non-exchange trading systems, White said.