ICAP Said to Consider Circuit Breakers for Treasury Bond Trading
ICAP Plc, which runs one of the world’s biggest electronic Treasury trading platforms, is considering circuit breakers as a safeguard against extreme volatility, according to a person familiar with the matter.
ICAP has discussed with clients the possibility of introducing curbs on its Treasury market, EBS BrokerTec, but no decision has been made, according to the person, who asked not to be identified because the talks are private. Guy Taylor, a spokesman for London-based ICAP, declined to comment.
A lack of circuit breakers — which pause trading when prices move too far, too fast — was blamed for exacerbating the 2010 U.S. stock market plunge known as the flash crash, which briefly erased almost $1 trillion of value. Their subsequent introduction was credited with preventing further routs.
The Treasury market had its own seizure on Oct. 15, when benchmark yields swung the most relative to overall yields since at least 2000. JPMorgan Chase & Co. chief Jamie Dimon called the move a “warning shot.” Federal Reserve officials recently said the combination of high-frequency traders, lower bond inventories at banks and more assets at bond mutual funds may have increased the “tendency for bond prices to exhibit volatility.”
“At a time when you have less depth in fixed income, it would make sense to have circuit breakers,” said Priya Misra, head of U.S. interest-rate strategy at Bank of America Merrill Lynch in New York. “And structurally we think that liquidity is worse and is not something that is coming back. But circuit breakers would have to be put in globally and since cash bonds are not traded on one exchange, it will take coordination across brokers to ensure circuit breakers work.”
Trading Automation
Automated trading firms now play a greater role in the Treasury market, increasing the possibility that price moves can get out of control before humans can intervene.
At the same time, Wall Street banks have reduced their market-making role. Dealers cut their U.S. government debt holdings to $22.9 billion as of May 20, down from a record high $146 billion in October 2013, according to Fed data. That helped to push a measure of volatility almost 30 percent higher in the past year.
The Wall Street Journal first reported Tuesday that ICAP was considering circuit breakers.
Source: Bloomberg – ICAP Said to Consider Circuit Breakers for Treasury Bond Trading
