High Frequency Trading dominates US Treasuries

27 April, AtoZForex, Lagos – The rise and rise of high frequency trading (HFT) goes on. After dominating the currency markets, US treasuries is the latest conquest for the algorithm style trading model. As pointed out by the Securities Industry and Financial Markets Association and American Bankers Association, the US Treasury market is actually the most important global benchmark for pricing and hedging spread asset classes and is a key transmission mechanism for US monetary policy.

Banks fall from glory

As high frequency trading dominates US treasuries, speaking about the effect of the structural developments giving room to the rise in HFTs in the US treasuries market, Shane O’Cuinn, a managing director at Credit Suisse complains that it has affected the bank’s willingness and ability to operate in this space. Here is O’Cunnin:

These traditional sources of liquidity have a reduced capacity to warehouse risk, and therefore banks have to become more dynamic in their provision of liquidity. This has, in turn, led not only to a definitive, structural reduction in market depth but also increased sensitivity of liquidity provision to price volatility. New sources of liquidity, such as HFTs, are a potentially unstable and unpredictable source of liquidity in times of volatility.

Such complains are understandable, considering that Wall Street banks have experienced a dip in revenues from government bond-trading business in the last five years.

High Frequency Trading dominates US Treasuries

Depicting further the fall of banks from their best treasury trading days, a research by Risk.net, showed a confidential list ranking the top 10 treasuries dealing firms by volume. It was found that eight of the top 10 firms on the platform were not banks. Again depicting the growing influence of principal trading firms and high frequency methods. These firms have been found to trade in and out of markets at speed, mostly keeping sizes small. Hence, not needing much liquidity to operate. Some establishment players believe that these funds disappear when liquidity is needed most.

See also: High Frequency Trading Tax Debate

Summarizing the effect as high frequency trading dominates US treasuries, the Securities Industry and Financial Markets Association and American Bankers Association notes:

With these changes in market structure has also emerged a class of market participants who largely remain outside of the current regulatory framework, and whose business models are fundamentally different than those of traditional, principal-based participants that used to be responsible for the majority of the volume in the market. The result can be higher volumes and lower trade sizes. However, while these participants are responsible for increases in volumes, this does not mean that such participants are establishing and holding positions or willing to meaningfully provide liquidity during stress events. These factors tend to exacerbate volatility in rapidly changing markets, even absent fundamental catalysts.

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