Fed's Powell Says U.S. Should Consider Changing Treasury Market Structure

By Ryan Tracy 

        WASHINGTON--A senior Federal Reserve official on Monday said the U.S. should consider changing the structure of U.S. Treasury markets in light of recent events that suggest they may be more prone to volatility.
        "Although the Treasury market remains deep and resilient, there are nonetheless reasonable questions as to whether market functioning can be improved," said Fed governor Jerome Powell. He doesn't oversee the Treasury markets directly but has an influential voice as a member of a Fed board that sets rules for large banks.
        Mr. Powell, in remarks prepared for an event at the Brookings Institution think tank, said he wasn't ready to endorse any specific change. But he questioned the benefits of a structure that caters to superfast, electronic trading, which has accounted for a growing share of Treasury market volume in recent years.
        "One can certainly question how socially useful it is to build optic fiber or microwave networks just to trade at microseconds or nanoseconds rather than milliseconds," Mr. Powell said. "The cost of these technologies, among other factors, may also be driving greater concentration in markets, which could threaten their resilience."
        "We can complain about certain trading practices in this new environment, but if the market is structured to incentivize those practices, then why should we be surprised if they occur?" Mr. Powell added.
        He also pushed back on criticism, leveled by some on Wall Street, that new regulations have made it harder for market participants to buy and sell Treasurys and other bonds by limiting big banks' ability to act as middlemen.
        Mr. Powell said regulations had "little to do" with a major swing in Treasury prices on Oct. 15 of last year, which some observers have said was a symptom of the problems. He said regulations "may be one factor driving recent changes in market making," but added, "these same regulations have also materially lowered banks' probabilities of default and the chances of another financial crisis."
        Antonio Weiss, counselor to the U.S. Treasury Secretary, also raised questions Monday about the role of high-frequency trading. "We need to consider whether the race for speed, at this already advanced stage, helps or hurts market functioning," Mr. Weiss said at the same event as Mr. Powell.
        Write to Ryan Tracy at ryan.tracy@wsj.com
        (END) Dow Jones Newswires

        August 03, 2015 10:56 ET (14:56 GMT)

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