The growing presence of high-frequency trading has essentially blurred the line between the US Treasuries futures and cash markets, according to a New York Federal Reserve blog released on Wednesday. High-frequency trading enable billions of dollars worth of trades between cash trading of US government debt on interdealer broker platforms and futures trading on the Chicago Mercantile Exchange in five milliseconds.
"Although futures usually lead cash, the reverse is also often true. Therefore, from a price discovery point of view, the two markets can effectively be seen as one," New York Fed analysts Dobrislav Dobrev and Ernst Schaumburg wrote in a blog post. Proponents of this type of trading that uses complex computer models say it has helped lower trading costs and allowed easier cross-market trading. Critics of high-frequency trading, however, blamed it for exacerbating the "flash" event on October 15, 2014 when the price of benchmark 10-year Treasuries notes swung three times its normal level in a span of minutes in the absence of fundamental economic news.
Cross-market trading, which accounts for around 8 percent of activity in the cash Treasury market on normal days, jumped to 15 percent on October 15, 2014, according to Dobrev and Schaumburg. There have been days when the near simultaneous trading between Treasuries cash and futures trading account for as much as 20 percent of cash market activity, they said. Wednesday's post, "High-Frequency Cross-Market Trading in US Treasury Markets," is the third in a series from the New York Fed examining the "evolving nature of market liquidity."