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High-frequency trading enable billions of dollars worth of
trades between cash trading of U.S. government debt on inter
dealer 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 Oct. 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 Oct. 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 U.S.
Treasury Markets," is the third in a series from the New York
Fed examining the "evolving nature of market liquidity."
(Reporting by Richard Leong; Editing by Jeffrey Benkoe)
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