Washington, D.C.—July 13, 2015—The FIA Principal Traders Group released a statement today in response to the Joint Staff Report on the U.S. Treasury Market on October 15, 2014.
Based on our preliminary review of this report, it seems to reflect our understanding of market behavior on October 15: principal traders continued to provide liquidity and maintain tight bid-ask spreads, even during the period of unusually high volatility, while engaging in sensible risk management practices.
We appreciate the inter-agency coordination involved in producing this analysis of the events in the Treasury market on October 15. Recognizing the complexity of these events, the authors engaged in a detailed transaction-level analysis of order book data during the period in question. This kind of data-driven, quantitative analysis is critical to understanding market dynamics.
We also appreciate that this report examines the events of October 15 within the broader context of the long-term evolution of Treasury markets. The report recognizes the significant changes to the structure and composition of markets that have occurred in recent years, and this provides a meaningful framework for analyzing individual market events.
Notably, the report identified principal trading firms as a significant source of liquidity and trading volume in the Treasury market. In particular, the report found that principal trading firms accounted for “the vast majority of market depth” in the order books for benchmark Treasury securities examined in this report. The report also found that “PTFs, as a group, also remained engaged as liquidity providers throughout the event window.”
Moreover, the report described how principal traders engaged in “rational risk management” practices: “PTFs almost exclusively reduced their risk by trimming the quantity of standing orders to buy and sell, but generally maintained, as a group, a narrow spread between their bid and offer prices.”
We look forward to reviewing the report in more detail and discussing the findings and policy recommendations with the regulators.