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A senior Federal Reserve official has warned that last autumn’s “flash crash” in US Treasurys could happen again due to the changing nature of the US government debt market, and urged banks, investors and exchanges to adopt a revised set of guidelines in response to the turmoil.
However, Simon Potter, executive vice-president of the Federal Reserve Bank of New York, warned in a speech on Monday that the unintended consequences of regulatory and market changes could mean that “that sharp intraday price moves become more common” in the future.
Jamie Dimon, the head of JPMorgan, also highlighted the October 15 “flash crash” in his annual letter to his shareholders, and said that it constituted a “warning shot across the bow”, attributing the sharpness of the moves to regulatory changes that encourage the hoarding of Treasurys and discourage banks from helping to cushion sharp moves in bond markets.
In a recent white paper on the increasing automation of trading in US Treasurys, the New York Fed highlighted explanations including computer-driven high-frequency trading; poor economic news leading to investors swiftly reversing bets against Treasurys; and changing structures in the bond market. But it said that experts “have generally been unable to attribute the price action to any single factor”.
“It is possible that changes in the participation or behavior of firms employing automated strategies — including broker-dealers and proprietary trading firms — had an effect on market liquidity and price movements that day,” he said according to a text of the speech.
Full article: Fed official warns ‘flash crash’ could be repeated (CNBC)