Oct 9 (Reuters) - The growth of high-frequency trading in U.S. Treasuries has made it more difficult to gauge real-time liquidity to trade U.S. government debt in futures and cash exchanges, according to a New York Federal Reserve blog published on Friday.

High-frequency trading is an automated strategy that can move billions of dollars worth of trades among different markets in a fraction of a second.

How easily investors and traders can buy and sell Treasuries, a $12.7 trillion sector, has become a concern in the wake of the Oct. 15 "flash" rally, when Treasuries registered wild price swings in just a 12-minute period.

While high-frequency trading strategy has helped market makers maintain tight yield spreads and consistent prices of closely related assets, traders and investors act not only on fundamental news but also the price movements themselves, economists Dobrislav Dobrev of the Federal Reserve Board and Ernst Schaumburg of the New York Fed said in their blog.

Dobrev and Schaumburg termed this situation a "liquidity mirage."

"The modern market structure therefore implicitly involves a trade-off between increased price efficiency and heightened uncertainty about the overall available liquidity in the market," they wrote.

Prices of recently issued or on-the-run Treasuries on platforms operated by BrokerTec and eSpeed, and futures trading on the Chicago Mercantile Exchange are probably competitive as a result of high-frequency trading, the economists said.

BrokerTec is owned by interdealer broker ICAP Plc, and eSpeed is part of exchange operator Nasdaq OMX Group Inc.

The actual liquidity available to an investor on these systems at any given time may not be as deep as it seems, the economists said.

Their study of liquidity reactions across the platforms found as many as 20 percent of Treasuries futures trades on the CME were associated with a depth reduction on the BrokerTec system.

"The evidence therefore supports the hypothesis that rapid depth reduction by (high-frequency trading) contributes to the liquidity mirage," Dobrev and Schaumburg wrote.

Friday's online article is a sixth and final in a second series from the New York Fed that examines changes in liquidity in the stock and bond markets.

(Reporting by Richard Leong; Editing by Lisa Von Ahn)
