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What Do Quoted Spreads Tell Us About Machine Trading at Times of Market Stress? Evidence from Treasury and FX Markets during the COVID-19-Related Market Turmoil in March 2020, Accessible Data
Figure 1. 10-Year Treasury Cash Market Functioning on February 21, 2020
The figure plots various measures based on quotes and trading activity in the benchmark 10-year Treasury security on the BrokerTec platform on February 21. It has three panels. The top panel plots quotes and prices of executed trades at a millisecond frequency. Prices and quotes vary more-or-less continuously, that is, without material price gaps between successive trades. The center panel plots the maximum volume of posted quotes (“market depth”) across the top 1 and 3 ask prices during each millisecond above the horizontal axis; and the depth across the top 1 and 3 bid prices below the horizontal axis. Measures of transaction flow—the sum of buyer- and seller-initiated trades in each millisecond—are also plotted above and below the horizontal axis, respectively. The total trade flow in each millisecond is almost always well within the maximum depth available near top of the order book. The bottom panel plots the spreads between the best ask and bid quotes, again at a millisecond frequency. Quoted spreads oscillate between only two values, which are one tick (the minimum price increment) apart.
Source: BrokerTec and authors’ calculations.
Note: Top panel units are $ per $100 par value; center panel units are $ millions, key identifies regions in order from top to bottom: Ask Depth (top 3 levels), Ask Depth (top of book), Trading Volume, Bid Depth (top of book), Bid Depth (Top 3 levels); bottom panel units are multiples of tick size (minimum price increment equal to 1.5625 cents per $100 of par value) with vertical axis based on a logarithmic scale. Time stamps for the cash market are Eastern Standard Time.
Figure 2. 10-Year Treasury Cash Market Functioning on March 13, 2020
The figure plots various measures based on quotes and trading activity in the benchmark 10-year Treasury security on the BrokerTec platform on March 13. It has three panels. The top panel plots quotes and prices of executed trades at a millisecond frequency. There are several instances with large gaps between successive prices and quotes. The center panel plots the maximum volume of posted quotes (“market depth”) across the top 1 and 3 ask prices during each millisecond above the horizontal axis; and the depth across the top 1 and 3 bid prices below the horizontal axis. Measures of transaction flow—the sum of buyer- and seller-initiated trades in each millisecond—are also plotted above and below the horizontal axis, respectively. There are several instances when the trade flow within each millisecond falls well outside the maximum posted depth. The bottom panel plots the spreads between the best ask and bid quotes, again at a millisecond frequency. Bid-ask spreads were much wider and more volatile than those shown in Figure 1, at times oscillating over a range from one to more than ten ticks.
Source: BrokerTec and authors’ calculations.
Note: Top panel units are $ per $100 par value; center panel units are $ millions, key identifies regions in order from top to bottom: Ask Depth (top 3 levels), Ask Depth (top of book), Trading Volume, Bid Depth (top of book), Bid Depth (Top 3 levels); bottom panel units are multiples of tick size (minimum price increment equal to 1.5625 cents per $100 of par value) with vertical axis based on a logarithmic scale. Time stamps for the cash market are Eastern Standard Time.
Figure 3. Quoted Spreads in the Benchmark Treasury Cash Market
The figure plots daily time series measures of average quoted bid-ask spreads for various tenor Treasury securities on the BrokerTec platform. It has four panels, each showing results for a different tenor; the 5-, 7-, 10-, and 30-year securities. Each plot shows two series: an equally-weighted measure and an alternative version weighted by the amount of trading volume at each spread point. Each have marked times at 2019-08-01 Global Growth Fears and 2020-02-24 Covid-19 Fears. All of the spread measures were little changed between February 2019 (the start of the plotted series) and early 2020. They increased sharply in early March 2020, with the size of the increase in spreads being larger for longer tenors. Spreads then fell back closer to pre-March levels, with the sharpest falls being for shorter tenors. In all cases, the increase in the volume-weighted measure in March was smaller than the increase in the equally-weighted measure.
Source: BrokerTec and authors calculations.
Note: Bid-ask spreads are expressed as a multiple of tick size (minimum price increment). The tick size for the 5-year Treasury Note is 0.78125 cents per $100 of par value while that for the 7-year Treasury Note, 10-year Treasury Note and the 30-year Treasury bond is 1.5625 cents per $100 of par value. The vertical axis is based on a logarithmic scale.
Figure 4. Quoted Spread Volatility in the Benchmark Treasury Cash Market
The figure plots daily time series measures of the volatility of quoted bid-ask spreads for various tenor Treasury securities on the BrokerTec platform. It has four panels, each showing results for a different tenor; the 5-, 7-, 10-, and 30-year securities. Each plot shows two series: an equally-weighted measure and an alternative version weighted by the amount of trading volume at each spread point. Each have marked times at 2019-08-01 Global Growth Fears and 2020-02-24 Covid-19 Fears. All of the volatility measures were generally relatively low between February 2019 (the start of the plotted series) and early 2020, albeit with occasional, short-lived increases. They increased by a larger amount, and more persistently, in early March 2020, with the size of the increase in volatilities being larger for longer tenors. Volatilities then fell back closer to pre-March levels, with the sharpest falls being for shorter tenors. With the exception of the 30-year bond, the increase in the volume-weighted measures in March was smaller than the increase in the equally-weighted measures.
Source: BrokerTec and authors calculations.
Note: Bid-ask spread volatility is expressed as a multiple of tick size (minimum price increment). The tick size for the 5-year Treasury Note is 0.78125 cents per $100 of par value while that for the 7-year Treasury Note, 10-year Treasury Note and the 30-year Treasury bond is 1.5625 cents per $100 of par value. The vertical axis is based on a logarithmic scale.
Figure 5. Quoted Spreads in the Treasury Futures Market
The figure plots daily time series measures of average quoted bid-ask spreads for 10- and 30-year Standard and 10- and 30-year Ultra futures contracts on the CME platform. For each of these four cases, two series are plotted: an equally-weighted measure and an alternative version weighted by the amount of trading volume at each spread point. Each have marked times at 2019-08-01 Global Growth Fears and 2020-02-24 Covid-19 Fears. All of the spread measures were little changed between February 2019 (the start of the plotted series) and early 2020. They increased in early March 2020, with the size of the increase in spreads being larger for the 30-year than the 10-year contracts, and for the Ultra than the Standard contracts. Spreads then fell back closer to pre-March levels. The increases in the volume-weighted measures in March was smaller than the increases in the equally-weighted measures. The increases in spreads in March were generally smaller in the futures market than in the cash market (shown in Figure 3).
Source: Refinitiv, Datascope Tick History and authors calculations.
Note: Bid-ask spreads are expressed as a multiple of tick size (minimum price increment). The tick size for the 10-year Treasury Note Futures and the 10-year Ultra Treasury Note Futures is 1.5625 cents per $100 of par value, while that for the 30-year Treasury Bond Futures and the 30-year Ultra Treasury Bond Futures is 3.125 cents per $100 of par value. The vertical axis is based on a logarithmic scale.
Figure 6. Quoted Spreads in FX, Equity and Energy Futures Markets
The figure plots daily time series measures of average quoted bid-ask spreads for euro and sterling foreign exchange (FX) futures, the E-mini S&P 500 futures, and the WTI crude oil futures contracts, all traded on the CME platform. For each of these four cases, two series are plotted: an equally-weighted measure and an alternative version weighted by the amount of trading volume at each spread point. Each have marked times at 2019-08-01 Global Growth Fears and 2020-02-24 Covid-19 Fears. All of the spread measures were little changed between February 2019 (the start of the plotted series) and early 2020, with the exception of a few modest increases in spreads for the sterling futures contract. The widening in spreads in these FX futures markets was comparable to that for the 30-year Ultra Treasury bond futures (shown in Figure 5). There was also some increase in quoted spreads in the equity futures market, albeit to a lesser extent. In contrast, quoted spreads in the oil futures market remained relatively stable throughout March; there have only been a couple of small, very short-lived spikes in the volume-weighted spread measure.
Source: Refinitiv, Datascope Tick History and authors calculations.
Note: Bid-ask spreads are expressed as a multiple of tick size (minimum price increment). The tick size for the Euro FX Futures is 0.005 cents per euro, the tick size for the British Pound Futures is 0.01 cents per pound, the tick size for the E-mini S&P 500 Futures is 25 cents per index point, while that for the WTI Crude Oil Futures contract is 1 cent per barrel. The vertical axis is based on a logarithmic scale.