In trading the preeminent risk-free security, the $21 trillion U.S. Treasury market supports the country’s borrowing needs, financial sta­bility, and investor appetite for a safe asset. Straddling the nexus between a securities market and a systemically essential institution, the Treasury market must function at all costs, even if other markets fail.

This Article shows that Treasury market structure is fragile, weakened by a regulatory model poorly suited to match its design. First, public oversight of Treasuries is fragmented, divided between five or more agencies. The rulebook for Treasuries is sparse, lacking basic guardrails common to other markets. Without effective rules and institutional coop­eration, regulators are ill-equipped to develop a taxonomy of risks and strategies to mitigate them. Second, private self-regulation cannot fill the gap. Comprising a rival mix of heavily regulated banks and lightly regulated algorithmic firms, major Treasuries traders lack incentives to cooperate. Instead, traders are motivated to take risks where the costs of detection and discipline are low. These deficiencies leave the market vul­nerable to failure and risk-taking as traders lack sufficient economic interest to maintain market integrity.

This Article concludes with two proposals to introduce stronger public and private oversight: (1) formalized coordination between regulators, led by the Financial Stability Oversight Council; and (2) mandatory clearing for Treasuries trades that forces traders to monitor each other. As the country’s economic lifeline, regulatory neglect of the Treasury market constitutes an exceptionally reckless administrative gamble with the potential to damage the country’s preeminence in global finance.

The full text of this Article can be found by clicking the PDF link to the left.


In March 2020, as the COVID-19 pandemic ripped through the economy, the then-$17 trillion market for U.S. government bonds (“Treasuries”) was brought to the brink of failure. Because investors rely on Treasuries to keep them safe during crises, the potential collapse of Treasuries presented an unthinkable doomsday scenario for global markets and the U.S. economy. 1 See Colby Smith & Robin Wigglesworth, US Treasuries: The Lessons from March’s Market Meltdown, Fin. Times (July 29, 2020), (on file with the Columbia Law Review) (highlighting the signifi­cance of the Treasury market to the global economy and providing a detailed account of the system-wide risk posed by the events of March 2020); Jeffrey Cheng, David Wessel & Joshua Younger, How Did COVID-19 Disrupt the Market for U.S. Treasury Debt?, Brookings (May 1, 2020), [] (“Treasury securi­ties are at the core of financial markets . . . [a]nd they are rainy day assets: safe and stable investments that banks, companies, and governments accumulate on the assumption that they can be quickly sold at low cost if they need cash fast.”); see also Bryan Noeth & Rajdeep Sengupta, Flight to Safety and U.S. Treasury Securities, Fed. Rsrv. Bank of St. Louis: Reg’l Economist, at 18 (2010),‌pdf/re/2010/c/treasury_securities.pdf [] (“[I]nvestors turn to U.S. Treasuries during times of increased uncertainty as a safe haven for their investments.”); Antoine Bouveret, Peter Breuer, Yingyuan Chen, David Jones & Tsuyoshi Sasaki, Fragilities in the U.S. Treasury Market: Lessons from the “Flash Rally” of October 15, 2014, at 5–6 (IMF, Working Paper No. WP/15/222, 2015),‌external/pubs/ft/wp/2015/wp15222.pdf [] (“The U.S. Treasury market is one of the largest and most liquid financial markets in the world, as well as one of the most important. Treasury securities are the bedrock of the financial system . . . .”). With the Dow Jones index plummeting by 2,000 and 3,000 points in a single day, the Treasury market was supposed to be the safe haven for investors that needed to sell Treasuries to raise cash or buy them as protection. 2 See David J. Lynch, Thomas Heath, Taylor Telford & Heather Long, U.S. Stock Market Suffers Worst Crash Since 1987, as Americans Wake Up to a New Normal of Life, Wash. Post (Mar. 13, 2020),‌markets-stocks-today-coronavirus (on file with the Columbia Law Review) (“The roughly $17 trillion Treasury market is the safe haven for investors who want a near-absolute guarantee that they will get their money back.”); Adam Samson, Robin Wigglesworth, Colby Smith & Joe Rennison, Strains in the U.S. Government Bond Market Rattle Investors, Fin. Times (Mar. 12, 2020), (on file with the Columbia Law Review) (“Several fund managers also raised alarm at the worsen­ing health of the US government debt market and warned that, without decisive action, dysfunction could have a widespread impact on fragile financial markets.”); Darrell Duffie, Still the World’s Safe Haven? Redesigning U.S. Treasury Market After the COVID-19 Crisis 2 (Brookings, Hutchins Ctr. Working Paper No. 62, 2020), [] [herein­after Duffie, Redesigning After COVID-19] (describing how the pandemic and associated financial disruption “call[ed] into question the longstanding view that Treasuries are a reliable safe haven in a crisis”); Ian Millhiser, The Dow Jones Had Its Biggest Point Drop in History Monday, Vox (Mar. 16, 2020), (on file with the Columbia Law Review) (reporting on the 2,997 point drop in the Dow Jones Index). Instead, as panic took hold and investors tried to cash out, the market faltered to a crawl. Waves of orders went unfulfilled. 3 See Smith & Wigglesworth, supra note 1 (“Trading conditions for US Treasuries had been poor for a while. But that Thursday—the day after Covid-19 was declared a pandemic—unnerving glitches escalated into mayhem.”). Treasuries prices—a benchmark against which virtually all other financial assets are priced—whipsawed wildly. 4 See id. (noting highly disruptive volatility in Treasuries prices that manifested in yields falling to an all-time low before rebounding higher and highlighting the extremely rare nature of such price swings); see also Michael Fleming & Francisco Ruela, Treasury Market Liquidity During the COVID-19 Crisis, Liberty St. Econ. (Apr. 17, 2020), [] (“The COVID-19 pandemic re­sulted in a sizable increase in uncertainty about economic conditions . . . [causing] market expectations of asset values to shift rapidly, and hence price volatility to increase . . . . [V]olatility caused market makers to widen their bid-ask spreads and post less depth . . . and the price impact of trades to increase.”). Facing the possibility that this unshakable market could fail, the Federal Reserve (the Fed) stepped in with over one trillion dollars of immediate stabilizing support. 5 See Lynch et al., supra note 2 (describing the Fed’s attempt “to smooth the opera­tions of the giant U.S. Treasury market” by injecting $1.5 trillion to support short-term funding markets for bonds as well as announcing the purchase of $60 billion in Treasury bonds); see also Michael Fleming, Asani Sarkar & Peter Van Tessel, The COVID-19 Pandemic and the Fed’s Response, Liberty St. Econ. (Apr. 15, 2020), https://libertystreet‌ [] [hereinafter Fleming et al., COVID-19 and the Fed’s Response] (describing the various stabilizing measures taken by the Fed in response to COVID-19 and the Treasury markets). One of the extraordinary interventions by the Fed included establishing a “temporary repurchase agreement facility for foreign and international monetary authorities,” or “FIMA Repo Facility,” to offer swap lines for dollars and Treasuries to foreign central banks in order to ease pressure on the Treasury market. Press Release, Bd. of Governors of the Fed. Rsrv. Sys., Federal Reserve Announces Establishment of a Temporary FIMA Repo Facility to Help Support the Smooth Functioning of Financial Markets (Mar. 31, 2020),‌pressreleases/monetary20200331a.htm []. Yet despite this intervention and additional aid to help revive capital markets, the quality and reliability of the Treasury market struggled to regain its footing. 6 See, e.g., Fin. Stability Bd., Holistic Review of the March Market Turmoil 2 (Nov. 17, 2020), [‌RAM4-DLER] (concluding that the exceptional interventions of central banks into the markets were crucial to saving the market in the short term, but “[t]he financial system remains vulnerable to another liquidity strain, as the underlying structures and mechanisms that gave rise to the turmoil are still in place”); John Dizard, Opinion, The U.S. Treasury Market Is Facing a Train Wreck (Dec. 11, 2020), Fin. Times,‌ffb2a3b4-1044-4a61-921a-e288ffb82170 (on file with the Columbia Law Review) (warning that “[t]here is going to be a train wreck at the front end of the [Treasury] curve next year” because “[t]here is way too much cash chasing too little paper” (quoting Mark Cabana, head of U.S. rates strategy for Bank of America Securities)). This decline could not have come at a worse moment for the U.S. economy. Treasury borrowing outpaced records, adding almost $3 trillion to the national debt over spring 2020 alone as Congress enacted far-reaching stimulus measures in response to the COVID-19 pandemic. 7 See Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (2020) (establishing various emergency measures to assist businesses and individuals at the onset of the COVID-19 pandemic in the United States); Martin Crutsinger, Treasury Says April–June Borrowing Will Be a Record $2.99T, AP News (May 4, 2020), (on file with the Columbia Law Review) (“The economic paralysis triggered by the coronavirus pandemic is forcing the U.S. Treasury to borrow far more than it ever has before—$2.99 trillion in the current quarter alone.”); see also U.S. Dep’t of the Treasury, Monthly Statement of the Public Debt of the United States (June 2020),‌reports/pd/mspd/2020/opds062020.pdf [] (showing a total marketable (tradable) public debt of $19.9 trillion out of a total public debt of $26.5 trillion). Just as the need for Treasuries has grown existentially urgent, the Treasury market has revealed itself to be fragile.

This suddenness notwithstanding, the ill-timed collapse in “risk-free” Treasury markets is unsurprising and overdue. Despite their singular importance, Treasuries have evolved under a regulatory framework that lacks effective supervisory and administrative power. Treasury markets have therefore failed to adapt to emerging risks and technological change while operating under a system of supervision that is far less intense than what exists for equity or corporate bond markets. The result is a market structure in which the regulatory guardrails are minimal and outdated, leaving it pervasively exposed to failure.

This Article makes two descriptive claims. First, public regulation of Treasury markets is characterized by excess fragmentation among supervi­sors, resulting in a lack of coordination as well as a sparse and bureaucrat­ically costly-to-change rulebook. This institutional framework is frag­mented by design. Whereas equities or corporate bonds are overseen by a primary regulator (the SEC), Treasuries are supervised by five or more major agencies, none of which has lead status. The Treasury writes the rules, the Federal Reserve Bank of New York (N.Y. Fed) facilitates debt auctions, the SEC and the Financial Industry Regulatory Authority (FINRA) supervise securities firms that trade Treasuries, the Fed monitors banks, and the Commodity Futures Trading Commission (CFTC) oversees the derivatives markets linked to Treasuries. 8 See Jerry W. Markham, Regulating the U.S. Treasury Market, 100 Marq. L. Rev. 185, 199–230 (2016) (providing an overview of these regulatory bodies and their respective roles in overseeing Treasuries); see also infra section I.B (describing the current patchwork of agencies and fragmented regulatory structure for Treasury market oversight). This shared oversight is not necessarily unusual. As Professors Jody Freeman and Jim Rossi observe, fragmentation is a common feature of the administrative state. 9 See Jody Freeman & Jim Rossi, Agency Coordination in Shared Regulatory Space, 125 Harv. L. Rev. 1131, 1134 (2012) (detailing the fragmentation common to the adminis­trative state and describing measures for coordination between agencies that exercise shared oversight over the same areas). This arrangement highlights the market’s significance for the financial system and has the advantage of pooling regulatory expertise and experience. But it also creates high institutional barriers to action 10 See Markham, supra note 8, at 199–208 (describing the allocation of oversight responsibilities between agencies and examples of types of misconduct in both the primary and secondary market); see also Luis Aguilar, Comm’r, SEC, Ere Misery Made Me Wise: The Need to Revisit the Regulatory Framework of the U.S. Treasury Market (July 14, 2015),–regulatory-framework-us-treasury-market.html [] (noting the need to update the regulation of Treasury markets and the current absence of responsive oversight). through information gaps, turf battles, inconsistent regulatory approaches between agencies, and the need to coordinate to fulfill basic objectives. 11 See Freeman & Rossi, supra note 9, at 1138–55 (detailing the rationales governing allocation of shared responsibilities across multiple agencies as well as ways to facilitate coordination despite resistance to change). Perhaps the most problematic downside to this system is that no single agency possesses a full picture of the Treasury market with which to craft an optimal supervisory strategy, should it decide to take the initiative. 12 See id. at 1150–51 (describing weaknesses associated with fragmented regulatory frameworks, including how fragmented regimes create information asymmetries that lead to inaction). The wide­spread view that Treasuries are a risk-free security can also engender a lack of urgency to develop an administrative framework capable of heightened vigilance. Reflecting these hurdles, agencies have faltered in exercising joint oversight in recent years. 13 See U.S. Dep’t of the Treasury, Bd. of Governors of the Fed. Rsrv. Sys., Fed. Rsrv. Bank of N.Y., SEC & U.S. Commodity Futures Trading Comm’n, Joint Staff Report: The U.S. Treasury Market on October 15, 2014, at 15–19 (July 13, 2015), https://www.treasury.
gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2014.pdf [] [hereinafter U.S. Dep’t of the Treasury et al., Joint Staff Report] (analyzing the Flash Rally, an episode of secondary market prices behaving extremely abnormally over a fifteen-minute period on October 15, 2014, and outlining the importance of regulatory reform).
Information sharing has required regula­tors to enter into complex agreements with one another just to pool and transfer data. 14 See Ryan Tracy & Andrew Ackerman, The New Bond Market, Regulators Scramble to Keep Up, Wall St. J. (Sept. 23, 2015), (on file with the Columbia Law Review) (demonstrating how the lack of such agreements created oversight difficulties by limiting important information sharing between regulators). And even straightforward, commonsense rulemaking has required time and mobilization, only to result in reforms that are partial in their coverage. 15 For example, in 2017, regulators created a trade reporting mechanism for Treasuries requiring banks and broker-dealers to provide trade information to regulators through FINRA’s Trade Reporting and Compliance Engine (TRACE). See Press Release, Bd. of Governors of the Fed. Rsrv. Sys., Federal Reserve Board Announces Plans to Enter Negotiations with FINRA to Potentially Act as Collection Agent of U.S. Treasury Securities Secondary Market Transactions Data (Oct. 21, 2016),
events/pressreleases/other20161021a.htm [] [hereinafter The Fed, FINRA Negotiation Press Release]. At the time it was promulgated, a securities firm could avoid reporting rules by not classifying itself as a FINRA-regulated broker-dealer firm, a loophole that was partially remedied in April 2019 by requiring trading platforms to specifically identify trading firms. See Alexandra Scaggs, Opinion, The Dealer–Trader Distinction and Treasury Market Regulation (Updated), Fin. Times (Oct. 28 2016), (on file with the Columbia Law Review) [hereinafter Scaggs, Dealer–Trader Distinction] (illustrating the FINRA broker-dealer registration-avoidance loophole used by some securities firms to evade the regulatory perimeter for Treasuries trading reporting rules); James Collin Harkrader & Michael Puglia, Principal Trading Firm Activity in Treasury Cash Markets, Bd. of Governors of the Fed. Rsrv. Sys.: FEDS Notes (Aug. 4, 2020),‌notes/feds-notes/principal-trading-firm-activity-in-treasury-cash-markets-20200804.htm [] (explaining that trade reporting was imperfect as infor­mation gaps remained even after implementation of the 2017 reporting system); see also infra Part III.

Perhaps most worryingly, these high administrative costs have pro­duced a rulebook for Treasury markets that is noticeably sparser than that applicable to participants in equities or the corporate bond market, limiting the levers available to regulators to monitor and discipline traders. According to one expert, out of the thousands of rules prescribed for equity brokers and dealers, only about forty-six apply to those in Treasuries. 16 See Ken Monahan, TRACE “Unlocks” the Treasury Market for the Official Sector. Everyone Else Gets a Peek Through the Keyhole, Greenwich Assocs.: Blog (Oct. 3, 2018), [] (noting that there used to be only thirty-nine rules pertaining to Treasuries prior to the 2017 Treasury reporting reform). Indeed, there is doubt even among regulators about which rules are in fact applicable to Treasury markets, leaving a question mark over the enforceability of otherwise mainstay prohibitions (such as uncer­tainty over rules governing brokers trading ahead of client orders). 17 See e.g., Rule 5320. Prohibition Against Trading Ahead of Customer Orders, Fin. Indus. Regul. Auth., [] [hereinafter FINRA, Rule 5320] (last visited Jan. 16, 2021) (applying the broker-trading rule to equity securities but remaining unclear about whether it applies to Treasuries traders that trade ahead of their clients). To clarify the matter, the SEC and FINRA have conducted a review to determine which rules do and ought to apply to Treasuries. See Letter from Stephen Luparello, Dir., Div. Trading & Mkts., to Robert W. Cook, President & CEO, Fin. Indus. Regul. Auth. (Aug. 19, 2016), https://www. [https:/
/perma”.cc/FA33-SHQT] [hereinafter Luparello, FINRA Request Letter] (request­ing a review of which FINRA rules apply to, or ought to apply to, Treasuries broker-dealers).
Fur­ther highlighting the limited tools available to regulators under this hands-off approach, trading platforms that only host Treasuries trades are exempt from the usual panoply of regulations that apply to securities trading platforms. 18 See, e.g., SEC Requirements for Alternative Trading Systems, 17 C.F.R. § 242.301(a) (2020) (exempting platforms that transact only in U.S. government securities from having to register as an alternative trading system (ATS) under the jurisdiction of the SEC). But see Press Release, SEC, SEC Proposes Rules to Extend Regulations ATS and SCI to Treasuries and Other Government Securities Markets (Sept. 28, 2020),‌/news/press-release/2020-227 [] [hereinafter SEC, ATS/‌SCI Release] (proposing to amend this exemption and include Treasuries trading platforms under Regulation ATS). Note, however, that this proposed amendment would not require a Treasuries ATS to register as a full exchange under Section 6 of the Securities Exchange Act of 1934. Id. While major equity trading exchanges like the New York Stock Exchange (NYSE) must provide regular disclosures about their operations and comply with fairness and good governance standards, 19 See, e.g., SEC Dissemination of Transaction Reports and Last Sale Data with Respect to Transactions in NMS Stock, 17 C.F.R. § 242.601(a) (“Every national securities exchange shall file a transaction reporting plan regarding transactions in listed equity and Nasdaq securities executed through its facilities . . . .”); SEC Order Protection Rule, id. § 242.611 (requiring exchanges to establish policies to prevent trade-throughs); Spotlight on Regulation SCI, SEC, [https://perma.‌cc/9YEE-EMZG] (detailing compliance with rules governing the resilience of technological and infrastructural processes underlying trading platforms) (last visited Jan. 16, 2021); see also SEC Regulation SCI—Systems Compliance and Integrity, id. §§ 242.1000–.1007 (requir­ing that certain “SCI entit[ies],” including “national securities exchange[s],” establish and maintain policies ensuring system resilience and security). venues that only trade Treasuries can avoid these regulations altogether. 20 See Mary Jo White, Chair, SEC, Prioritizing Regulatory Enhancements for the U.S. Treasury Market, Keynote Address at the Evolving Structure of the U.S. Treasury Market Second Annual Conference (Oct. 24, 2016), [] (“These basic and critical regulatory standards do not apply to platforms that trade U.S. Treasury securities.”). In the same address, White suggested eliminating the regulatory exemption for Treasuries trading platforms. See id. (“I have reassessed the decision . . . to exclude from Regulation ATS platforms that trade solely government securities.”).

This Article also argues that, in light of modern technological advances, private self-regulation in Treasury markets lacks structural incentives to fill the gap left by weak and fragmented public oversight. Historically, the purchase and trade of Treasuries have largely been inter­mediated by a cohort of top-tier banks and investment banks designated as “primary dealers” for the market. 21 See Dominique Dupont & Brian Sack, The Treasury Securities Market: Overview and Recent Developments, 85 Fed. Rsrv. Bull. 785, 786–87 (1999), https://www.federal [] (providing an overview of the function of primary dealers, as well as defining marketable securities and the types of bonds that generally comprise the U.S. Treasury market).
Currently numbering twenty-four firms, primary dealers are designated by regulators to oil the machinery of Treasuries trading by providing liquidity to the market. 22 See Primary Dealers: List of Primary Dealers, Fed. Rsrv. Bank of N.Y.,‌ [] [hereinafter N.Y. Fed, Primary Dealer List] (last visited Jan. 5, 2021). Because of their access to new issues, primary  dealers  are  also  the  key  conduits  for  investors  looking  to  buy  or  sell Treasuries. 23 See Dupont & Sack, supra note 21, at 789 (“[T]he [primary] dealer can facilitate transactions between customers . . . .”). Primary dealers are chosen for their capacity to regularly purchase government debt (and are expected to do so), and they are also usually networked banks and investment firms capa­ble of connecting with investors worldwide in the secondary Treasuries market. 24 See id. at 787–90; N.Y. Fed, Primary Dealer List, supra note 22 (describing how “[i]n order to be eligible as a primary dealer, a firm must . . . [d]emonstrate a substantial presence as a market maker that provides two-way liquidity in U.S. government securities” and is expected to “bid on a pro-rata basis in all Treasury auctions at reasonably competitive prices”). Importantly, the secondary market for Treasuries features an addi­tional significant aspect: the interdealer market, in which dealers transact with one another to manage their inventories. 25 Dupont & Sack, supra note 21, at 789. If one dealer has clients needing Treasuries that it does not have, it can tap into this interdealer space to purchase the securities from another dealer and satisfy investor demand. 26 Id.; see also infra section II.B. Traditionally, trading in both markets took place through telephones, faxes, and computer displays of orders, giving the market its reputation as an uncomplicated and ultrasafe corner of the financial system. 27 Compare Dupont & Sack, supra note 21, at 806 (describing the Treasury trading landscape in 1999, when most trades were executed via telephone), with Markham, supra note 8, at 198–99 (noting that Treasuries are traded virtually around the clock and underscoring the use of electronic trading for most Treasuries, including by high-frequency traders). With computer technology, dealer-to-customer markets have utilized “request for quote” (RFQs) through portals and specialist electronic platforms. See Kevin McPartland, Greenwich Assocs., U.S. Treasury Trading: The Intersection of Liquidity Makers and Takers 3 (2015) [hereinafter McPartland, Intersection] (asserting that RFQ remains the dominant method for trading despite changes in technology).

Over the last decade, however, the Treasury market has experienced a fundamental shift away from relying on just primary dealers and analog trading mechanics. It is now largely automated, populated to an increasing degree by high-speed algorithmic traders known as “high-frequency traders” (HFTs) that use preset computerized programs to trade in milliseconds and microseconds. 28 John Bates, Algorithmic Trading and High Frequency Trading: Experiences from the Market and Thoughts on Regulatory Requirements (unpublished manuscript), in Tech. Advisory Comm., U.S. Commodity Futures Trading Comm’n, Technological Trading in the Markets 27 (July 14, 2010),
ments/file/tac_071410_binder.pdf [] (“An algorithm is ‘a sequence of steps to achieve a goal’—and the general case of algorithmic trading is ‘using a computer to automate a trading strategy.’”).
At least in the interdealer market, primary dealers have ceded their dominance in competition with expert, automated firms that are more agile because they are smaller—and generally much less regulated. 29 See infra section II.C.1. (describing the transfer of dominance from traditional primary dealers to high-frequency trading (HFT) firms). High-speed automated trading now drives as much as 50% to 70% of Treasuries trading volume between dealers. 30 See U.S. Dep’t of the Treasury et al., Joint Staff Report, supra note 13, at 21, 36–39 (showing that on October 15, 2014, principal trading firms (PTFs)—a term commonly used to reference HFTs in Treasury markets—accounted for “more than 50 percent” of trading, and detailing the key features of PTFs and their Treasuries trading strategies); Smith & Wigglesworth, supra note 1 (“Electronic-style trading activity now accounts for more than 75 per cent of liquidity provision in the Treasury market . . . .”); Portia Crowe, High Frequency Traders Are Now Dominating Another Huge Market, Bus. Insider (Sept. 23, 2015),‌-market-2015-9 (on file with the Columbia Law Review) (noting that BrokerTec, one of the major platforms for dealers trading Treasuries with one another, was reported to intermediate around 65% to 70% of interdealer trading volume); Robert Mackenzie Smith, Client List Reveals HFT Dominance on BrokerTec, (Sept. 23, 2015), (on file with the Columbia Law Review) [hereinafter Smith, HFT Dominance] (noting that eight of ten traders on the top interdealer Treasuries trading platform were high-speed traders). Such trading is familiar in equities markets, and regulators have adopted a bevy of rules to mitigate negative externalities there. 31 See, e.g., SEC Regulation SCI—Systems Compliance and Integrity, 17 C.F.R. §§ 242.1000–.1007 (2020) (establishing rules governing electronic trading systems infra­structure in order to promote market resilience). But the advent of HFTs in Treasuries poses challenges within a lax regulatory environment characterized by patchy reporting, fragmented oversight, and weak levers to collect information on traders and platforms. 32 See Aguilar, supra note 10 (“The transformative changes that swept through the equities and options markets in the past decade have vastly reshaped the landscape of the Treasury market . . . . As a result, the structure, participants, and technological underpin­nings of today’s Treasury market are far different than they were just a few years ago.”); see also infra Part III. Without informational insight into the real-world effects of new traders and their strategies, regulators lack the knowledge and authority to effectively tackle the resulting risks. 33 See Tracy & Ackerman, supra note 14 (describing gaps in the current regulatory framework for governing Treasuries trading and the risks and consequences such gaps pose with regard to HFTs).

This lenient regulatory regime contributes to the limited private incentives for market actors to self-regulate. Professors Georgy Egorov and Bard Harstad observe that firms can either come together to self-regulate in the absence of an active regulator or they can do so in order to preempt oversight by a strict one. 34 See Georgy Egorov & Bard Harstad, Private Politics & Public Regulation, 84 Rev. Econ. Stud. 1652, 1652–57 (2017) (developing a model illustrating firms’ incentives for self-regulation in both the presence and absence of an active regulator). But because the regulatory landscape is so fragmented, the impending prospect of strict government monitoring is an unlikely motivating factor for Treasuries traders.

Even if market participants wish to police themselves, private incen­tives fostered by modern Treasury trading relationships undermine effec­tive self-policing. The self-interest that might once have pushed primary dealers toward promoting protective market behavior has diminished with the ascendancy of rival, less-regulated automated securities firms. Primary dealers traditionally had much to lose if the Treasury market performed poorly, but the economic bonds that used to keep them in line are fraying as they compete with new automated traders for market share. 35 As a small group of repeat players, primary dealers had once held significant economic skin-in-the-game and reputational investment in the franchise, offering a means to reduce information deficits and promote cooperation in detecting and managing risk. See infra section III.B (explaining the misalignment of regulatory incentives created by the coexistence of primary dealers and HFTs).

Thus, an overall picture emerges: The asymmetric distribution of reg­ulatory burdens between primary dealers on the one hand and high-speed securities firms on the other limits opportunities for private cooperation and mutually reinforces risk-taking behavior by both sets of players. Unwieldy public monitoring, combined with a light-touch rulebook, allows all firms to take risks or trade opportunistically with little chance of detection and discipline. Traders can also cheaply exit the market if something goes wrong, limiting how fully they must internalize the costs of their risky behavior. For the less-regulated, nonprimary dealer firms, the regulatory constraints are even weaker, further increasing their financial incentive to seek risk in Treasury markets. Faced with diminishing profits and a less lucrative franchise, primary dealers are also incentivized to take risks and shirk self-discipline. So, not only is the task of private oversight logistically harder as the number of traders proliferates and diversifies, but it is also problematic when self-policing would result in primary dealers imposing added costs on themselves in a period of fierce competition and lower profits.

The consequences of this regulatory neglect in Treasury markets were apparent even prior to the March 2020 COVID-19 crisis, as a number of disruptions over the years pointed to unaddressed fragilities at the heart of this supposedly failure-proof market. Famously, on October 15, 2014, the price of Treasuries surged well in excess of what would have been nor­mal for the time. 36 See Matt Levine, Opinion, Algorithms Had Themselves a Treasury Flash Crash, Bloomberg (July 13, 2015),
algorithms-had-themselves-a-treasury-flash-crash (on file with the Columbia Law Review) (describing the October 15, 2014 Flash Rally and discussing regulatory findings highlighting the behavior of “dumb” automated trading algorithms simply responding to price signals rather than fundamental information as contributing factors).
Just after 9:30 am, the market was roiled by some of the highest trading volumes in its history, and prices seemed to fluctuate at random. 37 See U.S. Dep’t of the Treasury et al., Joint Staff Report, supra note 13, at 15 (describing how yields dropped sixteen points and then subsequently rebounded, all within fifteen minutes). Despite the absence of any significant news, this abnormally rapid rise—and subsequent correction—caused Treasuries to suffer some of their largest price moves since 1998. 38 Id. at 17. The only three other occasions with greater price shifts have been in response to news of major policy changes, 39 Id. (observing that the other three instances of large intraday moves since 1998 “followed significant new fundamental information being received by markets”). The absence of a news trigger is significant, as it would not be unusual for the price of U.S. Treasuries to rise—in essence, for the returns (yields) from the Treasury bond to fall—after bad economic news. This is because investors generally seek a “flight to safety” by buying Treasury bonds (essentially lending money to the U.S. government), although this a simplification of complicated trends that are also affected by inflation, interest rates, and competing investment opportunities. See SEC, Interest Rate Risk—When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall 1–5 (2013),‌raterisk.pdf [] (illustrating the inverse relationship between Treasury prices and yields); Daniel Kruger, U.S. Government Bonds Fall as 10-Year Yield Climbs Above 3%, Wall St. J. (Apr. 13, 2018), (on file with the Columbia Law Review) (last updated Sept. 17, 2018) (same). but this “Flash Rally” came out of nowhere, and attempts to explain it delivered little by way of firm conclusions. 40 See U.S. Dep’t of the Treasury et al., Joint Staff Report, supra note 13, at 4 (finding “no single cause” for the price volatility); Levine, supra note 36 (“The regulators don’t know what caused the [volatility].”). Jamie Dimon, the Chairman and CEO of J.P. Morgan, hyperbolically remarked that such  price  movements  were  so rare  as  to   happen  only  once  every  three  billion years. 41 Levine, supra note 36, at n.7 (“Treasury securities moved . . . statistically 7 to 8 standard deviations[,] . . . an event that is supposed to happen only once in every 3 billion years or so . . . .” (quoting Jamie Dimon, Chairman and CEO of J.P. Morgan)). Despite Dimon’s optimism, however, a similar incident occurred only a few years  later  in  June  2018,   sending  Treasury  prices  into a  short  and  inexplicable tailspin. 42 See Brian Chappatta, Treasury Rally Was a Flash, Not a Crash, Bloomberg (June 7, 2018),
h-not-a-crash (on file with the Columbia Law Review) (positing that the second flash event may have been triggered by turmoil in emerging markets and Brazil, resulting in a flight to U.S. Treasuries).
Even outside of these flash events, other dis­ruptions also revealed the less-than-perfect operation of Treasury market infrastructure: The major trading platform for interdealer trading saw an hour-long shutdown in June 2019, slowing activity across the market. 43 Elizabeth Stanton, Nick Baker & Matthew Leising, Treasuries Hit by One-Hour Outage on Biggest Electronic Platform, Bloomberg (Jan. 11, 2019), https://www.bloom (on file with the Columbia Law Review) (describing the outage and highlighting the lack of a serious impact on the day owing to “fortuitous” market conditions).
To be sure, flash crashes, slowdowns, and platform malfunctions occur in other markets as well (like equities). 44 See, e.g., Steven Goldberg, Could Computerized Trading Cause Another Market Crash?, Kiplinger, (Apr. 3, 2018), [] (highlighting the dangers of “Wall Street’s robot traders” accidentally causing flash crashes, similar to the one which occurred on May 6, 2010). Nonetheless, scant regulatory atten­tion and limited levers for intervention leave Treasuries exposed to the possibility that traders come to see the market as a space where risk-taking is much less costly and detectable than elsewhere in capital markets.

This Article concludes by outlining two proposals to begin remedying the deficiencies underlying Treasury market regulation. First, it suggests mechanisms to foster stronger interagency cooperation and help fill the gaps in public regulation. As an initial step, Treasury regulators can benefit by developing a more systematic memorandum of understanding (MOU) to formalize cooperation, information sharing, and enforcement. 45 See infra section IV.A. To institutionalize pathways for interagency cooperation, this Article also proposes that regulators harness the coordination mechanism offered by the Financial Stability Oversight Council (FSOC), a post-2008 reform body that offers preexisting organizational expertise to map the connections between Treasury markets and the larger financial system. 46 See infra notes 366–370 and accompanying text.

Second, to mitigate currently misaligned incentives for private self-regulation in the high-frequency trading (HFT) era, this Article suggests creating a Treasuries clearinghouse—an industry mechanism that forces major participants to be more responsible for risk-sharing and mitigation, requiring each to have skin in the game in order to maintain the resiliency of the market. 47 See infra section IV.B; see also Duffie, Redesigning After COVID-19, supra note 2, at 20 (proposing central clearing for Treasuries as a possible solution to market fragility). Common to nearly all major markets, clearinghouses are a private solution to the risk that traders can renege on their bargains with counterparties. By supplying the clearinghouse with sufficient funds to make good on promised transactions, participants subscribe to a mecha­nism wherein their pocketbooks are at risk in case of another firm’s fail­ure. 48 See Yesha Yadav, The Problematic Case of Clearinghouses in Complex Markets, 101 Geo. L.J. 387, 392–93 (2013) [hereinafter Yadav, Problematic Clearinghouses] (describ­ing the core economic benefits of clearinghouses, notably to reduce counterparty risk, ensure risk-sharing, and increase information about exposures for the market, as well as downsides, including “misaligned incentives” that result from forcing participants to share in the loss should a member’s risky actions cause insolvency). As Professor Darrell Duffie also argues, a clearinghouse for the Treasury market could introduce a stronger focus on risk management and bring a more organized approach to protecting its safety and sound­ness. 49 See Duffie, Redesigning After COVID-19, supra note 2, at 15 (“Central clearing increases the transparency of settlement risk to regulators and market participants, and in particular allows [central counterparties] to identify concentrated positions and crowded trades, adjusting margin requirements accordingly. Central clearing also improves market safety by lowering exposure to settlement failures . . . .”). To be sure, clearinghouses are not a comprehensive solution; as in March 2020, market participants may still flee when it no longer suits them to trade, and algorithms could always go haywire. But a clearinghouse would provide a recognized bulwark that would anchor Treasuries trading to systematized risk sharing and management, motivating even rival trad­ers to cooperate more fully in self-monitoring and discipline.

This Article proceeds as follows. Part I establishes the importance of the Treasury market to the national economy, especially in the wake of COVID-19, and demonstrates that much of the vulnerability is a function of the uniquely fragmented and light-touch regulatory structure oversee­ing Treasuries. Part II outlines the market structure of Treasury markets and traces their evolution from a relatively simple structure dominated by primary dealers to one populated by high-speed automated traders. This Part also observes how the changing composition of Treasuries traders undermines effective private self-regulation. Part III analyzes the risks of weak public and private regulation in Treasury markets. Part IV suggests pathways for reform.