Tags: Treasurys | flash | crash | victim

CNNMoney: US Treasurys Might Be Next Victim of a Flash Crash

By    |   Monday, 10 Sep 2012 10:56 AM

On May 6, 2010, the Dow Jones Industrial Average plunged 1,000 points in minutes due to computer-run trading algorithms. This year, the stock market has suffered over 10,000 similar if smaller flash crashes, where stocks plummet for several seconds, estimates the research firm Nanex, according to CNNMoney.

And now U.S. Treasurys could be the next victim of such a flash crash.

The research firm Tabb Group says high-frequency trading of Treasurys has ballooned from a "negligible amount" five years ago to about 40 to 50 percent of daily volume, according to CNNMoney.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

A flash crash could cause Treasury prices to plunge sharply and cause yields to jump from 1.5 percent to 4 percent.

Equities traders have lead the way into high-speed, computerized trading, making profit with lightning fast trades on small price changes, but now bond trading firms are getting into the act and quickly catching up.

"It's been less profitable for high-frequency firms to trade equities, so these firms are looking at other asset classes," Justin Schack of Rosenblatt Securities told CNNMoney. "Treasurys are one of the most liquid markets in the world, so it's very fertile ground for high-frequency market making."

Computers are programmed to stop trading when prices move out of a predetermined range, CNNMoney explained. When that happens, trading stops and prices nosedive.

The botched initial public offerings of Facebook and the BATS stock exchange and the near death of Knight Capital all involved automated trading.

"Very sophisticated institutions known for their technological prowess have been badly stubbing their toes on the technology," CNNMoney quoted MIT finance professor Andrew Lo as saying. "What we've seen recently is the interaction between Moore's Law and Murphy's Law."

Moore's law says that the speed of computer chips doubles every two years.

"There has been a lot of value generated by the development of algorithmic trading and some [high frequency] strategies,” Kevin Cronin of investment management company Invesco told Forbes magazine.

“But it does not require much of a logical leap to see in these developments cause for concern.”

The rise of high-speed trading might prompt small retail investors, once the backbone of the market, to lose faith in the market abandon it, Forbes warned.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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