Flash Crash In Treasury Bonds: Market Robots Strike Again

The Market Robots Strike Again

Where is John Connor when you need him? We might need some help handling some robots.

At about 10 a.m. on the East Coast, just after the Federal Reserve released Chairman Ben Bernanke's statement prepared for his semi-annual Bataan Death March in front of Congress, the Treasury bond market went absolutely bonkers.

Bond prices collapsed, sending bond yields spiking dramatically higher. The sell-off was followed immediately by heavy selling in the metals and currency markets.

Traders quickly suspected a "fat finger" had caused the selling -- somebody had accidentally punched in the wrong numbers on their keyboard and sold more Treasury futures than they meant to.

Except the trade wasn't fully reversed, as is often the case with a fat-finger trade. And later the Chicago Mercantile Exchange denied that there had been a mistake in Treasury futures trading, according to CNBC's Bob Pisani.

The likelier culprit? Robots.

To be specific, trading algorithims set up by rocket scientists from MIT to read headlines and execute trades based on what those headlines say.

According to Jacob Bunge of Dow Jones's FX Trader, traders are now guessing that a bond-trading robot somewhere read the initial headlines about Bernanke's remarks, headlines that painted him as being far more upbeat about the economy than he actually was, and triggered a pre-programmed order to dump a bunch of Treasurys.

Other robots, meanwhile, which follow the Treasury market, saw a bunch of Treasurys being dumped and triggered a pre-programmed order to sell off gold and silver and some currencies.

Proponents of high-frequency trading and these brilliant algorithms say they bring a magical elixir known as "liquidity" to the market -- basically providing a lubricant for the market to trade more freely. That makes the market more efficient, theoretically.

Except when it makes the market completely bananas, as it did today and as it did during the big Flash Crash of May 2010, when the Dow Jones Industrial Average collapsed 1,000 points in a few minutes.

And as it will almost certainly do again.

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