Fasten Your Seatbelts: High Frequency Trading Is Coming To The Treasury Market
In what may be the gray swan that all hell is about to break loose, we read that one of the world's largest hedge funds, British Man Group with $58 billion in AUM, is about to launch High Frequency Trading - the same high volume churning, sub-pennying, liquidity extracting, stub quoting and quote stuffing parasitic algorithms that frequently crash the equity, and as of recently the FX and commodity markets, into that most sacred of markets: US Treasurys. The official spin: "The Man Systematic Fixed Income fund, yet to be launched, will try to identify and profit from dislocations in liquid government bond markets." What this really means is that the final frontier of market rationality is about to be invaded by artificial momentum generating algorithms, who couldn't care less about fundamentals, and whose propensity to crash and burn at the worst of times, may end up costing the Fed all those tens of trillions it has spent to keep the Treasury market calm, cool, collected, and largely devoid of any volatility and MOVEment. But all that is about to change: "The unit is run by Sandy Rattray, who co-developed the VIX. VIX volatility index, also known as the "fear index", widely used to measure investors' perception of risk." As a reminder, the VIX index is only relevant when there are surges in volatility, something which we are confident Mr. Rattray will no doubt bring to Treasury trading momentarily.
"Traditional fixed income investing (is) unattractive," Man's Systematic Strategies unit said in a note, citing "yields close to zero percent, increased credit risk in many government bonds, (and) little upside (and) big downside of being long bonds in (the) current environment.
"Market inefficiencies (are) likely to prevail in fixed income markets, creating investment opportunities."
A spokeswoman said on Thursday MSS was working on the fund and declined to give a launch date.
The fund will be the fourth portfolio run by Man's one-year old MSS unit, which manages $1.6 billion (996.5 million pounds) assets.
Last month Man announced the launch of the Man
Commodities fund, also run by MSS, which uses algorithms to trade 25
commodity futures contracts and also allows human intervention.
And here we were thinking that the only reason HFT has any incentive to participate in a market is to extract liquidity rebates, which of course do not exist in the TSY market. Stepping away from the endless lies of the HFT lobby, the truth is that the permabullish bias imputed by algos in Treasury trading will simply mean that slowly but surely the same low volume meltup in stocks that we have all grown to love, especially between 3:00 pm and 3:30 pm will now appears in the 10 year. Luckily, with a minimum rate threshold on bonds at the 0% bound, it means algos can only melt bonds up so much. Unless of course, some 19 year old computer sciences Ph.D. programmer forgot to tell the vacuum tubes, about to be buying and selling the long bond from you 10,000 times per second, this particular fact.