Fragilities in the U.S. Treasury Market: Lessons from the “Flash Rally” of October 15, 2014

By Antoine Bouveret, Peter Breuer, Yingyuan Chen, David Jones, Tsuyoshi Sasaki

October 13, 2015

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Antoine Bouveret, Peter Breuer, Yingyuan Chen, David Jones, and Tsuyoshi Sasaki. Fragilities in the U.S. Treasury Market: Lessons from the “Flash Rally” of October 15, 2014, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Changes in the structure of the U.S. Treasury market over recent years may have increased risks to financial stability. Traditional market makers have changed their liquidity provision by increasingly switching from risk warehousing to risk distribution, and a new breed of market maker has emerged with the rise of electronic trading. The “flash rally” of October 15, 2014 provides a clear example of how those risks can materialize. Based on an in-depth analysis of the event—complementing the authorities’ work—we suggest i) providing incentives for liquidity provision, ii) improving market safeguards, and iii) enhancing the regulation of the Treasury market.

Subject: Asset and liability management, Financial institutions, Financial markets, Futures, Futures markets, High frequency trading, Liquidity, Treasury bills and bonds

Keywords: Financial Stability, Futures, Futures markets, Global, High frequency trading, High-Frequency Trading, Liquidity, Liquidity provision, Market, Market depth, Market liquidity, Market participant, Market safeguard, Trading, Treasury bills and bonds, Treasury market, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/222
Stock No:

WPIEA2015222
ISBN:

9781513576220
ISSN:

1018-5941

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