NEW YORK (Reuters) - The increasing role of computerized trading in the U.S. bond market has boosted the risk to U.S. Treasuries trade, potentially causing more turmoil like the wild price swing that erupted on Oct. 15, according to a paper from a bond industry group released on Thursday.
Supporters see automated trading, in particular high frequency trading which uses complex models to almost instantaneously buy and sell huge volumes of bonds and other securities, as fostering liquidity and bringing down trading costs.
Critics said this type of trading strategy is disruptive and prone to be used to manipulate markets.
"The increased adoption of automated trading has also led market participants and regulators to articulate concerns about the potential for greater operational risk, disruptive market practices and trading strategies, and the risk of sharp, short-term disruptions to the Treasury securities market," Treasury Market Practices Group said in its "white paper" on automated trading.
TMPG, which is sponsored by the New York Federal Reserve, has recommended a set of industry practices on automated trading for bonds. They include avoiding strategies that could be disruptive to the market and adopting policies aimed at getting rid of strategies to manipulate prices and liquidity.
On Oct. 15, 30-year Treasuries bond prices jumped 6 points in a matter of minutes, resulting in record trading volumes and a rarely seen degree of price and yield swings.
The "common thread" of what happened in October and bouts of turbulence linked to automatic trading in other markets is that automated trading could outpace manual detection and intervention, TMPG said.
One of the main risks from automated trading cited by TMPG is operational, ranging from program malfunctions to algorithms reacting to wrong or unexpected data.
Automated systems could offer "rogue" traders a faster set of tools to manipulate markets, TMPG said.
Electronic trading accounts for more than half of the overall trading volume of Treasuries, with the rest primarily done over the phone between dealers and investors or among dealers.
Daily Treasuries volume averaged $524.5 billion in March, down from $558.9 billion in February, according to data from the Securities Industry and Financial Markets Association.
(Reporting by Richard Leong; Editing by Chris Reese)