Aggressive HFT in U.S. Treasuries

Co-authored with Steve Krawciw

U.S. regulators have recently questioned the role that high-frequency trading (HFT) plays in the bond market. The latest research from AbleMarkets studies a subclass of HFTs known as aggressive HFT. The research shows that:

1) Aggressive HFTs initiate, on average, 20% of trades in the U.S. Treasuries market.
2) Aggressive HFTs often trade U.S. Treasuries when no one else does: aggressive HFTs accounted for nearly all of the trades on the post-Thanksgiving Monday in 2014 and the post-Memorial Day Tuesday in 2015.
3) Participation of aggressive HFTs in the U.S. Treasury market has declined slightly in 2015 from 30% in much of December 2014 and January 2015 to 13% at the end of July 2015.

AbleMarkets Aggressive HFT Index deploys proprietary market microstructure analysis to pinpoint instances of aggressive HFT activity as a percent participation of volume traded. Figure 1 shows AbleMarkets aggressive HFT Index (HFTIndex.com) for U.S. Treasuries for the period of October 2014 – July 2015.

Figure 1. Evolution of Aggressive HFT Participation in the U.S. Treasuries as a Percentage of Volume Traded, measured by the AbleMarkets Aggressive HFT Index (HFTIndex.com).

As Figure 1 shows, aggressive HFT in U.S. Treasuries declined from over 30% by volume in January 2015 to just 13% by volume traded at the end of July 2015. While aggressive HFT in U.S. Treasuries comprised 20% by volume, it varied over time. In extreme cases, aggressive HFTs initiated most of the trades on the post-Thanksgiving Monday in 2014 and the post-Memorial Day Tuesday in 2015. In addition, there were clear periods of volatile aggressive HFT behavior (e.g., December 2014 – January 2015), where aggressive HFT ranged from 15% one day to 35% the next day, and stable aggressive HFT behavior (e.g., June – July 2015), where aggressive HFT participation changed by less than 1 percentage point from day to day.

The observed patterns of behavior can be due to several factors:
a) Triggers for aggressive HFT that are present in the markets, such as news, microstructure issues and the like
b) Volatility in the participation of other non-HFT traders, varying the total volume figures: the lower is the number of non-HFT in the U.S. Treasury markets, the higher is the relative participation of aggressive HFTs

Overall, aggressive HFTs do not appear to be a driving force of the U.S. Treasury markets or to be significant enough to warrant a concern. By comparison, the participation of aggressive HFTs in equities markets routinely tops 30% in many SP 500 equities. Instead, the behavior of aggressive HFTs in the U.S. Treasuries is comparable to other instruments in the fixed income space, and in foreign exchange in particular. In foreign exchange, the relative proportion of aggressive HFTs has been holding steady at 10-15% in most major currencies, such as Japanese Yen, Swiss Franc, British Pound Sterling, Australian Dollar and Canadian Dollar.

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