The majority of benchmark Treasury yields nowadays may have fallen to lows, but it didn’t happen as fast as it did on October 15, 2014. That’s when the benchmark 10-year note fell from 2.2% to 1.86% in just minutes.

What exactly happened? Five years later, regulators are still scratching their heads.

“Members did not have direct evidence for what caused the price volatility, but suggested a number of factors likely played a role including, the increase in automation and algorithmic nature of trading in Treasury markets and the effects of regulatory changes on banks and broker dealers’ ability or willingness to make markets and warehouse risk in times of stress,” said the minutes from a Treasury Market Practices Group meeting on February 26.

Based on a New York Federal Reserve report and republished by ForexLive, here are some possible causes:

  • Market depth declined and trading volume surged following the retail sales data release, as bank-dealers and principal trading firms (PTFs) changed their behavior in response to the high volatility.
  • PTFs’ share of trading volume-more than half in the futures and interdealer cash markets on October 15 and control days-increased significantly during the event window. Moreover, trading activity of PTFs and bank-dealers in the cash and futures markets is highly concentrated.
  • Only modest changes in net positions occurred during the event window, but there were more buyer-initiated trades as prices rose, and more seller-initiated trades as prices fell.
  • Several large transactions occurred between the retail sales release and the start of the event window, but the analysis does not suggest a direct causal relationship with the subsequent volatility.
  • The time required to process incoming futures orders increased just ahead of the event window, with significantly increased message traffic due to order cancellations.
  • “Self-trading” (where the same entity takes both sides of a trade) increased during the event window.

Technology and increased automation can certainly help businesses thrive, but they could also have adverse effects in the case of high-speed trading. A situation could occur where a liquidity crisis could take place where a high-volume sell could get no buyers, resulting in a crash like the one experienced five years ago.

“Members generally suggested that, given the structural changes in the market, including growth of automated trading and impact of regulations, there is an increased potential for further episodes of volatility and impaired liquidity in Treasury markets,” the Treasury Market Practices Group said.

It’s definitely something to note given the number of investors who have piled into safe haven Treasury notes the last few months.

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