Federal agencies report finds high-frequency trading a factor in October 'flash crash'
The “flash crash” in U.S. Treasuries on Oct. 15, 2014, came from several factors, including high-frequency trading, said a government report released Monday.
The report, prepared by staff at the Treasury Department, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission, said that “both simple and complex measures showed significant signs of deterioration” that day.
Yields on the benchmark 10-year Treasury ranged 37 basis points, before closing six basis points below its opening level. Between 9:33 a.m. and 9:45 a.m. ET, “yields exhibited a significant round-trip without a clear cause,” said the report.
While there have been three other occasions since 1998 where intraday changes were greater, all of those were driven by significant policy announcements. On Oct. 14, the only notable news was release of slightly weaker retail sales data. “For such a significant volatility and a large round-trip in prices to occur in so short a time with no obvious catalyst is unprecedented in the recent history of the Treasury market,” said the report, which analyzed non-public data from U.S. Treasury cash and futures markets.
In the report's findings, which officials stressed were preliminary, government officials identified several causes, including record trade volumes, with volumes as much as 10 times normal levels, and a decline in book order depth.
Principal trading firms represented more than half of traded volume, followed by bank dealers. The most active principal trading firms conducted more than 90% of PTF trades that day, while the 10 most active bank dealers accounted for 80% of activity, according to the report. It noted that some bank-dealer and hedge fund trading patterns “exhibit characteristics of high-frequency trading, while many smaller PTFs clearly are not trading rapidly.”
The officials said they will continue to monitor evolving market influences, and to focus on firms' trading and risk management practices.
The report is available on the Treasury's website.
