It has been more than a week since the release of the joint staff report “The U.S. Treasury Market on October 15, 2014” which examined a period of unusually high volatility in treasuries. The report continues to be a topic of news coverage and we at MMI have been watching it with interest. In all the coverage that has followed, we haven’t seen anyone praise the report for the triumph of forensic market analysis that it was. Instead, a lot of interest has focused on the introduction of the term Principal Trading Firms (PTFs).
In our view, this government report is a noteworthy achievement in part because it was able to tease out the threads of intricately braided market activity to distinguish market participants that were using high frequency trading (HFT) tools completely differently. Unlike many market event postmortems, this one was very careful not to conflate trading tools with traders.
The ability to successfully negotiate stock or bond prices very efficiently in a continuous market with a lot of shifting variables, is characteristic of HFT tools. They are used by a wide variety of market participants including banks, mutual funds, discount brokerages, and proprietary trading firms, among others, but these tools and traders are often lumped together for analysis purposes.
The term PTF to differentiate a category of traders from a category of trading tools is an important distinction. It is likely that banks and PTFs were both using quick-trading logic in their systems, but one participant – banks – chose to pull liquidity and widen spreads, while PTFs remained in the market, providing continuous liquidity.
Despite the fact that this analysis will go a long way toward bringing greater transparency to understanding market dynamics, the term PTF was met with suspicion. Some commentators viewed the term as evidence of a cozy relationship between regulators and HFT or an attempt by PTFs to distance themselves from any negative perceptions of HFT. Nothing could be further from the truth.
Although we at MMI had nothing to do with the government report coining the term PTF, we think it is a step forward in understanding the benefits that these firms provide to investors. We hope that going forward, commentators will see this term for what it is, a successful attempt to provide greater clarity of the roles and actions of market participants.
TIMOTHY MASSAD, CFTC Chairman
June 3, 2015 Speech