The long-awaited report into the cause of the October 2014 ‘flash crash’ in the US Treasury bond market has been released. The US bond market is one of the most liquid in the world and it shocked markets when 10y bonds plunged from around 2.20% to 1.86% in a matter of minutes. Within 15 minutes of this the market was trading back above 2.00% and by the end of the day the market had closed at 2.12%. The event became infamously known as the ‘flash crash’.
The report, composed by the New York Fed, the SEC, the Commodity Futures Trading Commission and the U.S. Treasury Department stated that the almost unprecedented market movements could not be attributed to a single or specific cause, but rather to a number of contributing factors. Among these was the unprecedented number of short positions being unwound (many, if not most, market participants were expecting the Fed to raise rates), the decline in order book depth, and changes in order flow and liquidity provision. There was also a high level of self-trading where sell orders were purchased by the same party and vice versa. “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.
It went on to say that “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” and that officials will “further study of the evolution of the U.S. Treasury market and its implications for market structure and liquidity”.