NEW YORK (Reuters) - Measures intended to control extreme swings in the U.S. Treasury market might end up hurting other markets and erode investor confidence in U.S. government bonds as a safe haven, according to a private report released on Friday.
Some U.S. regulators have suggested temporary halts in the cash trading in the $13 trillion market as a potential tool to avert another "flash rally" like the one seen on Oct. 15, 2014 when bond prices posted wild price swings in a 12-minute period.
These temporary halts or circuit breakers, which are in place in stock and futures markets, can be used to halt trading during times of excessive volatility, preventing unintended price spikes, or flash crashes, associated with liquidity and high-speed computer-driven trading.
In the report prepared by Promontory Financial Group, the firm said circuit breakers, also called volatility moderators, may not be practical given the way Treasuries are trading around the globe.
"Given the global and dispersed nature of trading in the cash Treasury market, there would be considerable practical difficulties in introducing such trading halts on a marketwide
basis," it said.
Critics of high-frequency or algorithmic trading, a computerized strategy that can move billions of dollars in fractions of a second, as a culprit for causing the excessive price swings during the Treasury "flash rally."
"More broadly, it should be noted that there is no evidence that the volatility event in October 2014 was caused by an out of control algorithm," the report said.
Rather it was the lack of market liquidity that exacerbated the extreme price swings in Oct. 15, 2014, it said.
Furthermore, the firm cautioned stopping trades of Treasuries even briefly may hurt other markets because its interconnections with these other markets.
Promontory said implementation of circuit breakers in cash Treasuries trading "could also risk damaging the view that Treasury securities are a store of liquidity, particularly under the very crisis conditions in which this attribute is most valued."
A limited application of circuit breakers on specific interdealer systems warrant further studies if they were to deal with technical glitches, or if a particular algorithmic strategy on a trading platform is seen disruptive, Promontory said.
Promontory's analysis was sponsored by the Securities Industry Financial Markets Association (SIFMA), which represents Wall Street dealers and investment funds, in its response to the U.S. Treasury Department's request for information on Treasury market structure.