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

Author/Editor:

Antoine Bouveret ; Peter Breuer ; Yingyuan Chen ; David Jones ; Tsuyoshi Sasaki

Publication Date:

October 13, 2015

Electronic Access:

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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.

Series:

Working Paper No. 2015/222

Subject:

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

English

Publication Date:

October 13, 2015

ISBN/ISSN:

9781513576220/1018-5941

Stock No:

WPIEA2015222

Pages:

44

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