Report Finds ‘No Single Cause’ of Oct. 15 Treasury Market Volatility

U.S. officials concluded there was “no single cause” of the unprecedented volatility that hit U.S. Treasury markets Oct. 15, 2014, citing instead broad changes in the structure of Treasury markets, including the growing role of high-speed trading.

The report, which was highly anticipated on Wall Street, said further study of the markets is needed. It also recommended a review of existing regulations.

Its conclusions add to a burgeoning debate about why the Treasury market, long seen as one of the world’s safest, is becoming more volatile. Many market participants blame new rules for big banks for increased volatility in fixed-income markets, saying they are restricting banks’ ability to step in and smooth price swings. Capital and leverage rules have made it more expensive for banks to commit heavy resources to facilitating bond trades for clients, or have caused banks to exit parts of the market entirely.

The report doesn’t draw a direct line between the unusual volatility and new regulatory restrictions on banks.

“Evidence to date is limited on whether regulatory changes have affected” behavior at “market-making” firms, including big banks, said a footnote to the report, which was prepared by staff at the Treasury Department, Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission.

The staff examined nonpublic trading data before, during, and after a 12-minute window in which the yield on a key U.S. Treasury note plummeted, then quickly rebounded even though there was “no obvious catalyst” in the news that morning. The staff said broader changes in the structure of Treasury markets, including the growing role of firms that use automated trading strategies, such as high-speed trading, probably played a role in the event.

Both fast trading firms and large banks reduced the number and size of orders they were willing to execute as prices moved, the report said, but the share of trading by high-speed traders increased significantly during the window of price swings. Some high-speed traders hedged as prices dropped that morning, while others “appear to have aggressively traded in the direction of price moves during the event window,” the report said.