Circuit breaker analysis fails to explain jobs data spike

The cause of a June circuit breaker trip on CME’s treasury futures market remains unknown, despite extensive analysis of the data.

The cause of a June circuit breaker trip in a US treasury futures market operated by the CME Group, a derivatives exchange, remains unknown, despite extensive analysis of the data.

Market data specialist Nanex published graphs detailing a 17 second time period on the morning of 7 June, the same day the US government was set to release crucial jobs data.

The data shows aggressive selling of Treasury Bond and Treasury Note futures on CME Group's Globex Futures market around half a second before the data is announced. This is followed by further aggressive gold selling just 62 milliseconds before the data is released.

As a result of the sudden spike in activity, CME Group's circuit breaker kicks in 482 milliseconds before the jobs data is released.

However, while the events leading up to the circuit breaker are intricately detailed, understanding why these market events happen remains a mystery, according to Nanex CEO, Eric Hunsader.

"What usually happens to the treasury market in the run up to the jobs data is everyone stops trading and the liquidity dries up in anticipation," he explains.

"So, it's very odd that someone has been trying to aggressively sell at a time when there is no liquidity."

While the reasons for this abnormal trading activity remain unknown, the events of 7 June demonstrate the effectiveness of circuit breakers in curbing potentially disruptive behavior.

The circuit breaker kicked in almost immediately following the flood of sell orders and the market was off for five seconds. While quotes could still be requested, trades were suspended. When it returned, the market rapidly recovered to its previous levels, suggesting the circuit breaker effectively curbed any potential disruption.

"The CME Group circuit breaker is very good. It responds very rapidly to unusual behavior and doesn't trip on false alarms so it is doing its job well here," Hunsader added.

However, the June circuit breaker contributes to a body of evidence suggesting some trading activity, particularly high-frequency trading, is leading to market instability, according to Nanex.

The Securities and Exchange Commission (SEC) is currently implementing a new limit up-limit down circuit breaker methodology for the market, which means trading in single stocks can be suspended, a practice which has been in place since 2010, but without the potential to be triggered by erroneous trades. It effectively places a limit on how much higher a bid or offer can go compared to the average price of a security over the past five minutes, preventing rapid price changes.

First stage implementation of the limit up-limit down methodology began on 8 April and the SEC has pushed for all National Market System securities to use this methodology by 8 October.