Tags: treasury bonds | federal reserve | high speed traders | new york

Fast Traders Create Illusion in Treasury Bonds, NY Fed Says

(Dollar Photo Club)

Friday, 09 Oct 2015 12:38 PM

The fastest movers in the $12.8 trillion Treasury market, known as high-frequency traders, are making it more challenging for investors to assess the depth of the market, according to research from the Federal Reserve Bank of New York.

After examining trading across the most active platforms, including futures on the CME Group Inc. and cash Treasuries on ICAP Plc’s BrokerTec and Nasdaq OMX Group Inc.’s eSpeed, the researchers found evidence that high-frequency traders create an illusion of liquidity in the Treasuries market. 

With their stealth technology, high-frequency traders are able to detect competing investor orders on one of the trading venues, and with a five millisecond delay — the shortest possible transmission time between the CME and BrokerTec — they’re able to pre-empt the order that’s likely to appear on the other venue. 

Investors often submit orders to buy or sell to all three venues in an effort to get the most competitive prices. The order is likely to reach one of the trading venues first, which gives the high-frequency traders the opportunity to profit from the time lapse.

Trade Patterns

The researchers pointed out a trade that may be completed by an investor on BrokerTec.

"As soon as the BrokerTec transaction is observed in the market data feed, co-located low-latency market participants may immediately seek to cancel top-of-book offers on eSpeed and CME or submit competing buy orders to eSpeed and CME," researchers Dobrislav Dobrev and Ernst Schaumburg wrote on the N.Y. Fed’s blog. Top-of-book orders reflect the highest buy and the lowest sell prices. Low-latency is another term for the high-speed trading technology.

"The striking cross-market patterns in trading and order-book changes suggest that quote modifications/cancellations by high-frequency market makers, rather than preemptive aggressive trading, are an important contributing factor to the liquidity mirage phenomenon," the researchers wrote.

The mirage arises because "market participants respond not only to news about fundamentals, but also market activity itself," the researchers wrote. "This can lead to order placement and execution in one market affecting liquidity provision across related markets almost instantly."

The researchers "did not find any evidence that the liquidity mirage was more pronounced on Oct. 15 compared with our control days." On Oct. 15, 10-year yields in the Treasury market dropped by 34 basis points, or 0.34 percentage point, before returning to end the day lower by only six basis points.

The blog post noted that high-frequency traders strengthen market efficiency and help to ensure that "market makers can maintain tight spreads and that consistent pricing of closely related assets generally prevails." That benefit, however, "comes at the cost of making the real-time assessment of market liquidity across multiple venues more difficult," the researchers said.


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The fastest movers in the $12.8 trillion Treasury market, known as high-frequency traders, are making it more challenging for investors to assess the depth of the market, according to research from the Federal Reserve Bank of New York. After examining trading across the...
treasury bonds, federal reserve, high speed traders, new york
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2015-38-09
Friday, 09 Oct 2015 12:38 PM
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