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Fed, Treasury Officials Join Call for Treasury Market Review

In recent remarks, officials from the Treasury Department and Federal Reserve suggested that regulators should reevaluate the structure of the Treasury markets, with a particular focus on the effect of high-frequency traders, according to the Wall Street Journal. Antonio Weiss, a senior counselor to the Treasury Secretary, stated that “[w]e need to consider whether the race for speed, at this already advanced stage, helps or hurts market functioning.” He worried that “[a]utomated trading may provide traders with additional tools to beat the system” and that regulators may want to consider requiring registration for market participants register and traders to hold additional cash margin on trades.

Federal Reserve Governor Jerome Powell suggested that a market structure that encourages high-frequency trading may be less resilient and further questioned “how socially useful it is to build optic fiber or microwave networks just to trade at microseconds or nanoseconds rather than milliseconds.” According to the article, others question whether recent regulations are to blame for more fragile markets by restricting the ability of large banks to act as middlemen.  While Powell admitted that regulatory action post-financial crisis “may be a factor driving recent changes” in banks withdrawing from their previous roles as market makers, he argued that “these same regulations have also materially lowered banks’ probabilities of default and the chances of another financial crisis.”

The comments from Powell and Weiss come after a similar call from SEC Commissioner Luis Aguilar and a report released by a joint working group regarding the October 15, 2014 Treasury market volatility event.