A year ago, U.S. regulators were spooked by a burst of rapid-fire trading in Treasuries. Over a 12-minute span that morning, the yield on the benchmark 10-year Treasury note plunged from 2.02 percent to 1.86 percent, then just as quickly shot back up. Treasury yields had fluctuated that much only three times since 1998, and each of those times there was an obvious catalyst. This time, there was no apparent cause.
The U.S. Treasury Department and four other federal agencies that oversee slices of the bond market began to look into what had happened. Nine months later they released a report laying out a reconstruction of Oct. 15, 2014, that contained enough of a dissection to impress even some high-speed traders who had been doing their own analysis. Still, for all its hard work, Treasury failed to fully answer the most important question: Who or what caused the wild price swings?
One government official still seeking answers is Antonio Weiss, the former Lazard Ltd. investment banker who had seemingly faded into the background after joining Treasury in early 2015.
His bid for a senior job had been squashed by U.S. Senator Elizabeth Warren, who portrayed Weiss as the poster child of government coziness with the finance industry. Weiss, who had made more than $15 million during his last two years on Wall Street, withdrew his name for consideration as undersecretary and settled for the less formal and more amorphous role of counselor to Treasury Secretary Jacob J. Lew.
Weiss, 49, ended up steering the examination of last October’s volatility and is now using the government report as a springboard to a deeper analysis of whether instability could hurt the world’s most important market, encompassing $13 trillion of outstanding debt and $500 billion of securities traded daily.
Treasuries are the standard that helps determine the risk and price of everything from home mortgages to corporate bonds, and are the primary safe haven for investors in times of turmoil. Trading has been reshaped in recent years by firms that use automated strategies and computer algorithms to transact in milliseconds. And yet the Treasury market was last studied by regulators in the late 1990s.
“We are in the early stages of conducting such a review in light of the very significant changes that have occurred in the market structure,” Weiss said in an interview.
Algorithmic traders, the driving agents of change, now coexist with more traditional dealers who still conduct many transactions by phone. But if regulators ramp up their scrutiny, it’s the computer-driven speed traders who may have the most to lose. They now account for about half the electronic trading in the Treasury cash market, up from 25 percent in 2008, according to research firm Tabb Group LLC. During the most frenzied moments of Oct. 15, 2014, they made up about three-quarters of the volume.
For Weiss and other regulators including Treasury debt-management officials Seth Carpenter and James Clark, the initial challenge is assessing the importance of data they don’t have.
One of the government’s first responses may be a push for an updated system for tracking trades. Unlike the stock and corporate bond markets, there is no real-time database of information on government bonds. While regulators can get access to data feeds from the private exchanges, the information isn’t stitched together to get a complete picture of moves in the market and it’s not disclosed to the public as it happens. Trades directly between dealers and clients — which could represent more than 40 percent of volume — are even more opaque, Weiss says.
Adam Cooper, chief legal officer for Citadel LLC, a big trader of Treasuries, says regulators are right to focus on post-trade transparency and improving oversight to ensure that Treasury markets are “fair, open, efficient and resilient.”
Gathering information from traditional dealers and high-frequency executives is a big part of Weiss’s work. In July, on the eve of the regulators’ report on Oct. 15, he ran a closed-door meeting at Columbia University in New York with banks, exchanges, advocacy groups and academics on market structure.
Attendee Jes Staley, the managing partner of hedge fund BlueMountain Capital who has emerged as a leading candidate to run Barclays Plc, expressed concern that a lot of trading is now done outside tightly regulated banks, said a person with knowledge of his comments who asked not to be named. The buying and selling has gravitated to firms that don’t get as much scrutiny from government officials, Staley said. Oaktree Capital Group co-founder Howard Marks was also among executives who attended the private meeting.
Staley didn’t respond to a request for comment Marks declined to comment.
Weiss told the group that Treasury was still looking into changes that had taken place and wary of the potential for future risks. Weiss, along with Federal Reserve GovernorJerome Powell, is leading a conference on bond market liquidity Oct. 20-21 at the New York Fed.
While Treasury can set new ground rules for trading, the patchwork of agencies overseeing U.S. debt could be an obstacle for Weiss if he tries to overhaul the market.
The Commodity Futures Trading Commission, which supervises the derivatives markets, and Securities and Exchange Commission, which oversees some of the trading platforms, have each spent the last five years weighing potential responses to new forms of electronic trading. The CFTC is only now planning to propose new registration requirements and risk controls for speed traders, reforms that will face months or years of industry pushback.
Trading firms and their Washington lobbyists are already warning that any changes could hurt liquidity and increase costs. Meanwhile, Blackstone Group’s Stephen Schwarzman and Republicans in Congress say regulators should recognize that rules imposed after the 2008 financial crisis requiring banks to hold more capital are driving some of the volatility in the bond markets by discouraging lenders from participating as much as they once did.
Weiss, Lew and members of the Fed have responded by writing opinion columns and making speeches in defense of the Dodd-Frank Act.
“We’ve pushed back against some pretty simplistic arguments, and in doing so have pointed to a whole bunch of market structure dynamics that are incumbent upon us to address,” Weiss said in the interview.
Finance executives who have met with Weiss describe him as soft-spoken, open-minded and eager to listen. People familiar with his thinking say he’s interested in staying in government in a future Democratic administration and that he didn’t join Treasury to enhance his resume for a better investment banking job. Puerto Rico’s debt crisis, the growing role of online lenders and housing finance are among the other topics he’s focusing on at Treasury.
Weiss advised companies on corporate mergers at Lazard and when he decided to leave it wasn’t a surprise to colleagues who knew of his interest in policy issues. Weiss’s experience “working behind the scenes” should benefit Treasury, said Felix Rohatyn, special adviser to the firm’s chairman, Ken Jacobs.
By defying Senator Warren’s expectations that he would be a Washington friend to Wall Street, Weiss has even won over some of the lawmaker’s allies, including Better Markets President Dennis Kelleher.
“It’s clear to me that Antonio has been in the lead, someone who understands the markets and from the very beginning was scratching his head saying, ‘What’s the data say?”’ said Kelleher, whose group advocates for more stringent financial regulation. Because of Weiss, “the drumbeat and hyperbole has decreased significantly” against Dodd-Frank, he said.