NEW YORK, Aug 20 (Reuters) - The volume of U.S. Treasuries traded within one millisecond has jumped four-fold in three years as improved technology has promoted faster trading, according to a New York Federal Reserve blog post on Thursday.
The massive increase was pointed out in a study of “workup” protocol used in the $12.6 trillion U.S. Treasuries market, where a marketable order opens a short time window, during which traders and investors can conduct additional transactions at the same price.
New York Fed analysts Michael Fleming, Ernst Schaumburg and Ron Yang said there were two sharp rises in workup volume on the BrokerTec trading system, which coincided with major upgrades on its platform in March 2006 and March 2012.
Most interdealer trading of recently issued Treasuries occurs on platforms operated by BrokerTec, which is owned by interdealer broker ICAP and eSpeed, which is a part of exchange operator Nasdaq OMS Group Inc.
Each BrokerTec upgrade shrank the elapsed time, or latency, to trade on-the-run Treasuries.
This “may have facilitated the introduction of more sophisticated automated trading strategies that were already prevalent in equity markets by 2006,” the N.Y. Fed analysts wrote in the blog post.
High-frequency trading is a type of automated strategy that can move billions of dollars worth of trades among different markets.
Critics of high-frequency trading have blamed it for exacerbating the “flash” event on Oct. 15, 2014, when the price of benchmark 10-year Treasuries notes swung to three times its normal level in a span of minutes in the absence of fundamental economic news.
Following the two technological upgrades, the average workup time on BrokerTec for on-the-run 10-year Treasuries notes has fallen to 3 seconds in 2015 from 9 seconds in 2003.
Workup time is the period related to the transmission and processing of communication to trade a Treasuries security.
The most dramatic effect perhaps happened after the 2012 upgrade, according to the Fed analysts.
The share of additional workup orders joining within a millisecond rose from zero to 2 percent in 2012, and then further jumped to 10 percent this year.
“This provides a clear illustration of how improvements in technology have promoted automation and speed of trading in the Treasury market,” Fleming, Schaumburg and Yang wrote.
Thursday’s post, “The Evolution of Workups in the U.S. Treasury Securities Market,” is the fourth in a series from the New York Fed examining the “evolving nature of market liquidity.”
For details on the blog post, see (Reporting by Richard Leong; Editing by Jeffrey Benkoe and Bernadette Baum)
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