A funny thing happened on the way to regulating the US$13.4trillion Treasury market: Humans turned out to be harder tounderstand and regulate than computers.

Algorithmic strategies are generally pretty straightforward.They exploit their speed advantage to profit from small pricediscrepancies during the trading day.

Human dealers, on the other hand, profit from knowing exclusiveinformation. They trade over the phone, out of sight of bothcompetitors and regulators.

Humans and machines are often pitted against each other. Someargue that the subjective human touch makes the fixed-income marketbetter and less prone to accidents, while the algorithmic set isvulnerable to computer glitches, manipulation, and flashcrashes.

Treasury Department officials are trying to wrap their headsaround this argument; they're accepting comments throughFriday to their request for information about the structure ofthe world's biggest government bond market.

Regulators seem inclined to give high-frequencytraders an even greater edge by forcing Wall Street banks todivulge information that once gave them an advantage.

There are legitimate concerns about further impairments toprimary dealers and even more concentrated trading in themost-active Treasuries, making it even harder to broker older,less-active notes. But a more automated Treasury marketwould probably make it more fair and might even revive tradingvolumes.

Investors are already gravitating toward futures contracts,which are traded on exchanges, instead of cash bonds, which aretraded in phone calls. An average $311 billion worth ofTreasury futures traded each day last year, up 21 percent from fiveyears earlier, according to data from CME Group cited in theBloomberg article.

Regulators are poised to start collecting data by later thisyear on individual Treasury transactions, “with the major questionsbeing the cost of reporting and how widely the data will bedisseminated,” RBC Capital Markets analysts led by Michael Clohertywrote in a report on Monday. “Real-time reporting would beexpensive,” they wrote, potentially hurting the return on equity“of being a Treasury market maker and thus causing capital to flowaway from Treasury desks.”

Such reporting would also make the world's biggest debt marketmore transparent, helping policy makers and traders alike betterunderstand the dynamics that underpin daily activity.

Even without new rules, money is flowing away from primarydealers, leaving them less equipped to serve in the role theyonce did. Revenues have plunged, with Morgan Stanley, for example,reporting on Monday a 54 percent decline in fixed-income revenuesin the first quarter compared with those in the period a yearearlier. Wall Street executives are looking at more electronicstrategies as they note the sea change underfoot in theindustry.

Computers are eliminating inefficiencies that padded the pocketsof debt dealers for decades. The way to secure the Treasury marketisn't to reinstate those inefficiencies. It's to collect good dataand to understand patterns well enough to find modern-daysolutions.

This column does not necessarily reflect the opinion ofBloomberg LP and its owners.

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