Nowadays, a persistent worry in the U.S. Treasury market is that high-speed traders are running amok.
One Wall Street veteran says he’s hit on a way to tame their most predatory instincts.
David Rutter, the former head of the biggest electronic venue for Treasuries, says his startup will launch a new trading platform called LiquidityEdge Select this week. According to Rutter, a big draw is that it will enable clients to shut off bids and offers from firms they suspect are using hair-trigger algorithms to trade against their orders. He’s enlisted Cantor Fitzgerald to backstop the transactions and signed up about 90 clients, including most of the Treasury market’s 23 primary dealers and several high-speed trading firms.
“There’s a lot of pent-up demand to fix the inherent disadvantages” on some of the existing venues, Rutter said from his midtown Manhattan office. Going up against certain kinds of speed traders can be “a huge frustration.”
Success is far from guaranteed and there’s considerable debate over whether high-frequency traders, or HFTs, actually do more harm than good. But one thing is undeniable: technological advances and post-crisis bank regulations designed to limit risk-taking are transforming the inner workings of U.S. government debt trading. What’s resulted is a sense of disorder among the more traditional players in the world’s most important bond market.
“The game is changing every day,” said Tom di Galoma, the managing director of government trading and strategy at Seaport Global Holdings. On electronic platforms, the rise of HFTs “concerns anybody else who trades on them.”
Regardless of who or what is responsible, there are signs U.S. government bonds have gotten harder to trade, even as Treasury Department officials say the $13.7 trillion market is sound and the ability to transact remains robust.
An average of $491 billion of Treasuries have changed hands each day in the past year, down from $600 billion in 2011, according to JPMorgan Chase & Co. The ability to trade without moving prices has also deteriorated, with another measure indicating Treasuries are now 50 percent more sensitive to price fluctuations than they were five years ago.
At the same time, the market itself has become more prone to sudden shocks, with the Oct. 15, 2014, “flash crash” in Treasury yields the most prominent example. While regulators still haven’t figured out what triggered it, they concluded that automated trading firms made the wild ride that much worse.