US officials: No single cause for 2014 bond market 'flash crash'

US officials: No single cause for 2014 bond market 'flash crash'

A joint U.S. officials staff report revealed that last year's bond market "flash crash" could not be attributed to a specific cause, but rather to a number of contributing factors.

The report, which was composed by the New York Fed, the SEC, the U.S. Treasury Department and the U.S. Commodity Futures Trading Commission, said that there was an unprecedented number of short positions unwound on Oct. 15, 2014, as well as a decline in order book depth, and changes in order flow and liquidity provision.

It added that another "notable aspect of trading on October 15 was the heightened level of self-trading during portions of the event window. Self-trading, for the purpose of this report, is defined as a transaction in which the same entity takes both sides of the trade so that no change in beneficial ownership results. Self-trades appeared in both cash and futures market data at varying levels across firms and time periods.28 In the cash market for 10-year Treasury securities, for example, self-trading represents 5.6 percent of the total activity on control days, and 4.2 percent on October 15."

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That day, yields on the benchmark 10-year notes plunged about 30 basis points from its previous-day close of 2.2 percent to about 1.9 percent from about 9 a.m. to 9:36 a.m. ET.

Once it reached the 1.9 percent trading levels, however, the benchmark yield spiked to trade above 2 percent once more within 15 minutes. U.S. Treasurys settled higher from their previous closing, yielding 2.12 percent.

US Treasury in Washington, DC.
Mandel Ngan | AFP | Getty Images

"For such significant price movements to rapidly occur without a clear catalyst in one of the world's most liquid markets in such a short period of time is highly unusual," the report said.

The report also said that they will continue to study market structure, review current regulations and strengthen surveillance to avoid other similar events.

"The abrupt occurrence of such significant and unexplained volatility ... calls for a deeper analysis of the conditions that contributed to the events of October 15 and the structure of this important market," it said.

It added that official will "further study of the evolution of the U.S. Treasury market and its implications for market structure and liquidity, continued monitoring of trading and risk management practices across the U.S. Treasury market and a review of the current regulatory requirements applicable to the government securities market and its participants, an assessment of the data available to the public and to the official sectors on U.S. Treasury cash securities markets, and continued efforts to strengthen monitoring and surveillance and to promote interagency coordination related to the trading across the U.S. Treasury market."

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U.S. officials added that principal trading firms had 73.5 percent of the total trading volume during the crash, while also saying that banks accounted for 21.4 percent of trading volume at the same time.

"Everyone's animal spirit is dead. This is a pretty dramatic move when everyone was expecting higher rates," George Goncalves head of U.S. interest rates strategy at Nomura Securities, told Reuters after the dust had settled on a very volatile trading day. "It's all about capital preservation at this point. All the crowded trades are being tested, which is why I'm not sure this is over."

U.S. officials also noted that Oct. 15, 2014 was the fourth-largest trading day within the Treasurys market with no major news events.

The Feds also stipulated that there was no indication of the Dodd-Frank Act factoring into the day's volatility.