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Marketwide Treasury Trading Halts On The Horizon

Tyler Durden's picture




 

Over the seven or so months since last October’s Treasury flash crash, the world has gradually woken up to what we’ve been saying for years. Namely, that between the Fed sucking up all the high quality collateral and HFT algos’ tendency to chase down the same rabbit holes, what was once the most liquid market on the planet now has the potential to trade like a penny stock on any given day depending on the machines’ interpretation of the headlines. 

Now, bond market liquidity is all the rage with everyone from sellside credit strategists to prominent buysiders to JP Morgan’s billion-dollar man warning that illiquidity will likely lead to further instances of extreme volatility in bond markets. Indeed, even the ECB’s Mario Draghi said Wednesday that investors should prepare for “more volatility” going forward. 

In a sign of the times, ICAP, which handles nearly two-thirds of Treasury trading activity between HFTs and banks is considering the implementation of circuit breakers in the Treasury market to halt trading in the event of an ‘accident.’

WSJ has more:

ICAP PLC is studying the possibility of temporarily halting Treasurys trading following large price moves, according to people familiar with the matter.

 

Such a program would mark the first use of such safeguards in the $12.5 trillion U.S. Treasury market.

Circuit breakers are routinely used to halt trading in stocks when price fluctuations exceed predetermined ranges.

 

London-based ICAP is raising the idea with some of its customers, one of the people said, and weighing the pros and cons of adopting such controls, which already are commonplace in equity markets in the U.S. and elsewhere. According to Sandler O’Neill + Partners estimates, ICAP’s BrokerTec unit handles about 60% of Treasurys trading activity between banks and high-speed trading firms, which account for a large share of overall trading.

Not everyone is thrilled with the idea, as some traders suggest curtailing investors’ ability to take refuge in traditional safe-haven assets could play havoc with other markets:

Some traders worry that timeout periods in the world’s most liquid securities market would reduce investors’ access to the perceived safety of Treasurys when other markets are declining, and could raise the possibility of distorted prices in related markets like derivatives that are closely tied to government bonds.

Of course, the VaR shock that took hold in German bunds last month has served to heighten concerns...

ICAP’s discussions come on the heels of large one-day price swings in Treasurys and German bunds, two of the largest, most liquid markets in the world, over a period of months. The events touched off a debate about whether electronic bond venues need heightened risk controls.

...but some say implementation would be difficult absent across-the-board cooperation...
Such procedures would be vastly more difficult to apply to bonds, observers say. While much of the bond markets are traded electronically today, trading doesn’t take place on exchanges and the handful of platforms catering to bonds don’t coordinate with each other on how to handle extreme price moves.
“In a world where liquidity can move so quickly from one venue to the next, the absence of an industrywide agreement on when to halt trading poses a risk to the bond market,” said Adam Sussman, head of market structure at institutional equities-trading platform Liquidnet.
As a reminder, here's a look at TSY market depth since the crisis...
And while everyone debates how to safeguard bond markets from increasingly volatile conditions brought about, in part, by central bank asset purchases, bond markets went crazy this morning after one of the world's most prominent central bankers warned on bond market volatility. 

 

These are your markets on central planning.

 

 

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Wed, 06/03/2015 - 15:19 | 6160235 NoDebt
NoDebt's picture

Nobody needs liquidity if you have good enough circuit breakers.

I'm going to prove that point right now by shoving a knife in my toaster and pressing the lever down.  Be right back.

 

Wed, 06/03/2015 - 15:22 | 6160251 nuubee
nuubee's picture

I'm concerned about the free ion content of your liquidity if you try this.

Wed, 06/03/2015 - 15:42 | 6160329 CrimsonAvenger
CrimsonAvenger's picture

I'm not a scientist. Does that mean he's going to pee himself?

Wed, 06/03/2015 - 15:27 | 6160270 KnuckleDragger-X
KnuckleDragger-X's picture

What we're seeing is the early lobbying efforts for the next bail-out. All our alleged leadership can do is kick the can a little further, even if they have to follow it over a cliff to get the next kick.....

Wed, 06/03/2015 - 17:34 | 6160710 CClarity
CClarity's picture

Only the "big boys" will be left - just as planned. 

No more free markets, no more real price discovery. Pricing will be dictated to you, your access and ability to transact will be at the whim of who sets what mediums of trade can be - cash, credit, bitcoin, shell necklaces, which governments and which corporations (humans) have favored status, etc...  In essence, you will have no free choice but to exit this world left.

 

Wed, 06/03/2015 - 15:28 | 6160275 Burt Gummer
Burt Gummer's picture

US Military Unveils Most Advanced Fighter Jet Known To Man - F35B Lightning II

https://www.youtube.com/watch?v=rMm1Uapzvdg

Wed, 06/03/2015 - 15:34 | 6160296 Seek_Truth
Seek_Truth's picture

Cool story bro.

Too bad china makes the chips with kill switches.

 

Wed, 06/03/2015 - 15:41 | 6160326 Traderone
Traderone's picture

He hasn't come back yet. 

Wed, 06/03/2015 - 17:04 | 6160630 Bobbo
Bobbo's picture

Karma:  He's going to come back as a toaster.

Wed, 06/03/2015 - 16:59 | 6160615 sudzee
sudzee's picture

Oh oh still not back. Thank god for free Obamacare.

Wed, 06/03/2015 - 15:19 | 6160236 Spitzer
Spitzer's picture

If the same historical percentage of savings was in gold as we had under the classical and exchange gold standards, we have a few trillion in the rearview mirror. Trillions

Wed, 06/03/2015 - 15:22 | 6160247 madbraz
madbraz's picture

They will halt when prices go up only, once again, in typical pro-stock fashion.

Wed, 06/03/2015 - 15:27 | 6160258 Dr. Engali
Dr. Engali's picture

Like I said before, when the time comes that people believe they should get out it will be too late. Selling will be outlawed and the casinos will be closed. Thanks for playing, here's your complimentary Spider man towel.

Wed, 06/03/2015 - 15:26 | 6160263 i_call_you_my_base
i_call_you_my_base's picture

By the time everyone wants to sell the HFTs will have seized the market. And as soon as it opens again the same thing will happen. Normal people will not be able to sell.

Wed, 06/03/2015 - 15:35 | 6160302 jakesdad
jakesdad's picture

am I completely off base in saying this sounds like putting a fuse on the main ground wire in your home's electric panel?  if that much curren't flowing across it there's a reason for it & cutting it is only going to redirect the flow, not disipate the surge?

Wed, 06/03/2015 - 15:45 | 6160337 lunaticfringe
lunaticfringe's picture

They manipulate everything else, I just wonder what took them so long.

Wed, 06/03/2015 - 15:48 | 6160349 Soul Glow
Soul Glow's picture

Don't worry, they are printing future debt revenue to buy the bonds.  It'll all work out.

:)

Wed, 06/03/2015 - 15:53 | 6160365 sudzee
sudzee's picture

Shot accross the bow of both China and Russia or is the US getting prepared for managed default. If you can't trade the " most liquid paper on earth " should it not be called default.

Wed, 06/03/2015 - 15:57 | 6160380 Ajax_USB_Port_R...
Ajax_USB_Port_Repair_Service_'s picture

Circuit breakers and martial law. Problem solved! Stay in your homes and await further instructions.

Wed, 06/03/2015 - 16:39 | 6160543 TeethVillage88s
TeethVillage88s's picture

ICAP Headquarters: London, United Kingdom

A Self-Regulatory Organization (SRO).

Wed, 06/03/2015 - 16:48 | 6160582 TeethVillage88s
TeethVillage88s's picture

WSJ Doesn't fact check since puchased by the CIA?

Federal Debt Held by the Public
2015:Q1: 13,114,314 Millions of Dollars (+ see more)
Quarterly, End of Period, Not Seasonally Adjusted, FYGFDPUN,

"Such a program would mark the first use of such safeguards in the $12.5 trillion U.S. Treasury market."

WSJ just publishing govt talking points.

Wed, 06/03/2015 - 18:39 | 6160948 bbq on whitehou...
bbq on whitehouse lawn's picture

When the Yen rallies the Japenese are worried they will not be able to buy UST. No central bank worries about selling UST only buying.
Its like throwing Japan under the bus forcing a hyperinflationary reaction. Who wants a dead currency buying up their countries goods and services. So this is a way to stop that, cold.
Japans is slowly being cut off from liquidity.

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