Regulators: No single reason for bond market ‘flash crash’

WASHINGTON (AP) — The Treasury Department and other government agencies said Monday they are unable to pinpoint a single reason for a period of extreme volatility that hit the Treasury securities market on Oct. 15 last year.

Treasury, the Federal Reserve and the other agencies issued a joint report saying that a variety of factors, including record trading volumes, may have contributed to the volatility, which was dubbed the “flash crash” in the bond market. Yields on 10-year Treasury bonds gyrated wildly for a brief period during the day.

More than five years earlier on May 6, 2010, a massive “flash crash” jolted the stock market. The Dow Jones industrial average plunged hundreds of points in minutes before it eventually closed 148 points lower. Regulators later traced the disruption to an investment firm that executed a computerized selling program in an already stressed market. The firm’s trade, worth $4.1 billion, touched off a chain of events that ended with investors swiftly pulling their money from the stock market.

In April, U.S. authorities charged a British trader with helping set off the flash crash from his London home through his use of ultra-fast computer software and a bluffing technique that enabled him to make nearly $800,000 in profit that day.

Republicans have charged that the October volatility in bond trading could be linked to the massive overhaul of financial markets that Congress approved in 2010 to try to prevent a repeat of the 2008 financial crisis. But officials said they found no evidence that regulatory changes from the Dodd-Frank Act played a role.

Treasury Secretary Jacob Lew last week said that the regulators’ investigation found that the bond market problems had not been caused by regulatory changes but by a variety of other factors, such as a shift in trading from traditional brokerages and trading firms to faster electronic trading platforms.

The report recommended that the rules governing the Treasury bond market be reviewed. It also suggested upgrades to procedures used by regulators to monitor daily trading activities in a rapidly evolving market.

The report stressed that while the way investors trade on the Treasury bond market has changed, the market remains the deepest and most liquid government securities market in the world.

On Oct. 15, the yield on the 10-year Treasury bond traded in a range of 37 basis points, with the sharpest moves occurring between 9:33 a.m. and 9:45 a.m. Eastern Time. Since 1998, there have been only three times when the intra-day move of the 10-year bond has been larger. All those incidents were linked to major news, such as the announced start of large bond purchases by the Federal Reserve.

The report lists various developments that “may have contributed to the heightened volatility” that day, but the regulators were unable to isolate a single factor.

The report called for further study of how the Treasury market has evolved in recent years. It also said the current regulatory requirements governing the market should be reviewed to determine whether any changes are needed.

In addition to Treasury and the Fed, the agencies contributing to the study were the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve Bank of New York, which carries out bond trading operations for the central bank.

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Associated Press Business Writer Marcy Gordon contributed to this report.

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