WASHINGTON––Senior officials at the Treasury Department and
Federal Reserve questioned the benefits of high-frequency trading
in U.S. Treasury markets, suggesting market overseers are building
the case for new rules targeting the firms.
Fed governor Jerome Powell and Antonio Weiss, a senior counselor
to U.S. Treasury Jacob Lew, said Monday that the government should
re-evaluate the structure of U.S. Treasury markets in light of
recent events that suggest they are more prone to swings.
The remarks, made at an event hosted by the Brookings
Institution think tank, were the latest evidence that Washington is
growing more concerned about signs that financial markets have
grown more volatile with the growth of fast trading. Officials have
lately focused on a huge 12-minute swing in the yield of a key U.S.
Treasury bond on Oct. 15—the Treasury market's version of the 2010
stock price dive known as the "Flash Crash."
Buying and selling Treasurys, as well as financial products tied
to them, is central to how global financial markets operate on a
daily basis. In recent years, superfast, electronic trading has
expanded to account for about half of volume in the most active
parts of the Treasury market on a typical day.
Messrs. Powell and Weiss said that development, along with other
changes, warrant a re-evaluation of how the Treasury markets are
structured.
"We need to consider whether the race for speed, at this already
advanced stage, helps or hurts market functioning," Mr. Weiss
said.
He said the Treasury Department and financial regulators should
consider new rules, including requirements for Treasury-market
participants to register with authorities and hold more cash on the
margin against each trade. He said activities like self-trading, in
which a fast-trading firm takes both sides of the same trade, raise
questions about fairness. "Automated trading may provide traders
with additional tools to beat the system," Mr. Weiss said.
Mr. Powell, who has an influential voice as a member of a Fed
board that sets rules for large banks, didn't endorse any specific
rule changes, but said the current market structure, which
encourages superfast trading, could be less resilient than in the
past. "One can certainly question how socially useful it is to
build optic fiber or microwave networks just to trade at
microseconds or nanoseconds rather than milliseconds," he said.
Bill Harts, chief executive of the Modern Markets Initiative, an
advocacy group for high-frequency trading firms, said those firms
support "a data-driven analysis of how additional regulation could
make the markets more efficient."
"It is because of those high-speed tools that investors have
never had it better in terms of" being able to buy and sell at
their desired price, Mr. Harts said.
The Oct. 15 event has focused the government on the issue of
Treasury- market volatility, which is a concern because a lower
appetite for the bonds during a crisis could drive up borrowing
costs for the government, corporations, and consumers.
A report last month from staff at the Fed, Treasury, Securities
and Exchange Commission, and Commodity Futures Trading Commission
found the events of Oct. 15 had no single cause. The report said
fast traders accounted for the majority of trading volume that day
and noted they can be part of independent firms, like hedge funds,
but are also part of large Wall Street banks.
Some on Wall Street say new regulations are to blame for
more-fragile markets because they have made it harder for big banks
to act as middlemen between buyers and sellers.
U.S. officials don't appear convinced their rules are the
problem. Mr. Powell said regulations "may be one factor driving
recent changes in market making," but added "these same regulations
have also materially lowered banks' probabilities of default and
the chances of another financial crisis."
Another significant change in Treasury markets: The Federal
Reserve is now holding far more Treasury bonds as part of its
programs to stimulate the economy.
U.S. officials are expected to further discuss the issue of
Treasury market structure during a conference this fall at the
Federal Reserve Bank of New York.
Write to Ryan Tracy at ryan.tracy@wsj.com
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