- More Flash Crashes To Come As Shadow Banking Liquidity Collapses!
by Tyler Durden, www.zerohedge.com
Remember the algo-ignited, six sigma anomaly that sent 10-year yields down 30 bps in seemingly no time flat on the morning of October 15? Well despite the CFTC’s contention that it was “just a high volume day” without “any break in liquidity,” the Center for Financial Stability is out with a new report which cites the Treasury flash crash as a glaring example of what happens when an increasingly illiquid market collides head-on with “herding investment behavior.”
From the CFS:
On October 15, the deepest and most liquid market in the world demonstrated a six standard deviation move in less than two hours, a move that happens once in 506,797,346 days! It is impossible to suggest that this supersized move in the US Treasury market was due to downward assessment of economic expectations. Economic expectations shift weekly – if not daily. Clearly, a shift in the structure of the US Treasury market and substantial reduction of private sector market makers is at the core of recent complications. Similarly, this issue extends well beyond simply the sovereign debt market for US securities, as a result of the interconnectedness among markets and the unique role for Treasury debt as benchmark securities. To be sure, a sustained “flash crash” in the world’s leading fixed income market could readily unleash a pronounced slowdown of the global economy, or worse.
Put simply, excessive (and incessant) Fed meddling has fundamentally altered the market structure, creating all types of strangeness (the 2-, 5-, and 10-year all special for example) and in the process of sucking collateral from the system, the central bank has made things far more precarious. Recall what Bloomberg had to say about this back in October: