The Fed came out with a warning this week about the bond market. Fed executive Vice President Simon Potter expressed concerns that extreme volatility like the October “flash crash” could become more common, perhaps the result of high frequency trading, or more surprisingly, too much regulation. Simon Potter doesn’t know exactly what caused the October spike. It could be because of high speed trading. Or because reforms enacted by regulators after the financial crisis, like increasing the amount of capital banks hold, could have unintentionally created more volatility.
The bond Flash Crash happened past October, actually wasn’t a crash at all, it was the opposite, a spike. In a 15 minute period, the yield on the 10-year treasury jumped more than two percent, which may not sound like a lot, but statistically speaking it was a price swing that should only happen once every 1.6 billion years.
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