All Those options written on CDS indices continue to explode in popularity.
So much so that Barclays analysts are now warning the options may end up influencing the behavior of the indices themselves. (Why? Because all those dealers need to hedge. Can we say impending gamma trap?)
Read more on the tail wagging the dog in credit index options over here.
Buried in BlackRock’s recent report into bond market liquidity was a bombshell bit of news.
Here’s the story:
BlackRock Inc. is muscling into trading venues that had long been the exclusive territory of big banks as the world’s biggest asset manager seeks to make up for declining liquidity in the bond market.
BlackRock revealed last week that it’s now trading bonds directly with inter-dealer brokers, following years of warning that liquidity is waning. In September, BlackRock said the corporate bond market is “broken.”
Banks have long facilitated the business, but regulations passed after the 2008 crisis hobbled their ability to do so. By trading with inter-dealer brokers — an industry that includes ICAP Plc and Tullett Prebon Plc — BlackRock is circumventing a middleman.
Money managers are “looking to get liquidity anywhere they can get it, and the other side is the inter-dealer brokers — their business model has been totally turned upside down,” Kevin McPartland, head of research for market structure and technology at Greenwich Associates, said in a phone interview.
Tara McDonnell, a spokeswoman for New York-based BlackRock, declined to comment.
A large investor trading directly with inter-dealer brokers marks a sea change for Wall Street, where big bond trades traditionally are executed between asset managers and large banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc. Trading venues run by ICAP and Tullett Prebon, meanwhile, have historically brokered trades between banks and stayed clear of interacting directly with buy-side investors such as BlackRock …
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This week, the US.government released its report on the events of October 15.
I was disappointed.
The 72-page report has lots of points of interest but doesn’t come up with any definitive reason for the sharp movements in the 10-year U.S. Treasury. More disappointing than that (for me) was the report’s treatment of the events leading up to the day and specifically its very brief mention of volatility selling.
Here’s what the report said:
In addition, market participants reported that some large asset managers had maintained positions structured to profit from a continuation of the low-volatility environment that characterized much of 2014, though data to validate such claims are limited. Some market participants have speculated that a change in the distribution of certain options-specific risk factors among certain firms could have been a contributing factor. In particular, anecdotal commentary suggested that some dealers had absorbed a portion of the sizable “short volatility” position believed to have been previously maintained by large asset managers. As volatility spiked on October 15, those positions would have prompted some dealers to dynamically hedge this exposure, exacerbating the downward move in yields.
Long-time readers of this blog may remember that this is something I’ve written about before, specifically in a piece for the Financial Times entitled: “Caught on the wrong side of the ‘vol’ trade.” Unlike the Oct. 15 report, that article names a specific player who was said to have suddenly stopped selling vol.
“Pimco was a massive seller of volatility and when Gross left they started taking that position back,” says one hedge fund trader. “The Street was still thinking that short was out there. People expected the road to be there and the road wasn’t there.”
Given the debate over whether large asset managers are or are not systemically-important, it’s shame the Oct. 15 report did not dive into this particular theme a bit more.
John Lefevre, the former banker behind the GSElevator Twitter account, has written a book and it has some pretty fascinating tidbits about the business of selling bonds. Readers of my work (the three of you out there) will know that this is a favourite topic of mine and Lefevre’s experience as a fairly senior syndicate guy means he has some some authority here. Even Matt Levine, who isn’t generally a GSElevator fan, thinks so.
Here’s what I found most interesting after reading a preview.
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