Base, term, contra, dealt currency
September 25, 2010
If an FX dealer quotes a currency rate – say USDCHF – as 0.9877 that means USD is the base currency and CHF the term currency. The rate quoted is CHF/USD, the number of Swiss Francs to the US Dollar. If a client trades at the quoted rate, then the dealt currency is the one that specifies the unit of the trade. So if USD is the dealt currency, and the trade size is 10,000,000 then we’re trading 10,000,000USD. Which means a trade size of 987,700CHF. In this case CHF is the contra currency.
CLOB stifles innovation ?
September 14, 2010
Thanks to Matt for the heads up on this article. In pt III Tusar asserts that Trade-At “essentially creates the CLOB [consolidated limit order book]–the thing that everyone agrees would stifle innovation.” Now my knowledge of algo equity execution is certainly not state of the art. But it’s news to me that there’s a body of opinion that thinks CLOBs stifle innovation. Certainly the advantage of CLOBs is that they aggregate liquidity for a security, and provide a public, visible live price during trading, and a record of open and close prices too. They also tend to come with clearing arrangements. This is exactly the arrangement that the industry has been inching towards for the OTC stuff that was so problematic in 2008, with the introduction of swaps clearing, which should improve transparency.
I suspect that Tusar is talking his own book. Plus ca change ! Of cause major broker dealers like Goldman want “innovation” in the form of multiple dark pools and execution venues, including their own. That leads to fragmented liquidity, which causes opacity and hinders price discovery. Which is good for Goldman, and bad for clients who will need expensive Goldman execution services.
Update: there’s an enlightening discussion of Trade-At here.
Greek govt bonds
April 28, 2010
The price action on Greek government bonds over the last couple of days has been staggering. I’ve been watching the short end 2yr GGBs. Yesterday the yield went out from 14% in the morning, through 15% to 16% in the afternoon. This morning the yield hit 20% on the 2012 GGBs. At the time of writing it’s calmed down to 17%. This compares to yields of 0.8 to 2% for benchmark EGBs, depending on coupon.
For those not familiar with fixed income pricing, yields are inversely proportional to prices. Rising yields means falling prices. Prices are quotes as percentage of par. For benchmark German, French, Belgian or Dutch EGBs short end prices are ~99 to 105% of par. Bear in mind the coupons ! Those high GGB yields mean investors and speculators are only prepared to pay ~67% or 77% of par. Which reflects the market’s view of the default risk.
The flows are intriguing too, but I won’t comment here 😉
O’Kane on Asset Swaps
April 27, 2010
This is a good read for those interested in understanding the asset swap structure, and why asset swap margins are an integral part of bond quotes on Bloomberg and any single dealer channel.
Eurex Market Data
February 3, 2010
Eurex publishes a lot of intersting information about the heavily traded Euro Govt Bond futures, Schatz (2yr), Bobl (5yr) and Bund (10yr). You can see the trade volume on each contract for today here, together with the open interest. You can see a 15 min delayed price chart for Schatz here. But most interestingly, you can get access to historical order book data. You have to pay for it of course, but there’s a free sample in the big zip: a full day’s data for Bund on 23 Mar 2007 including all orders and trades. From this data one could reconstruct the state of the order book at any point during the day with disaggregated depth.
Quantivity on learning algo
January 11, 2010
Nice post by Quantivity on learning about algo trading. I’m familiar with Harris and Hasbrouck, but not much else he mentions. I wonder if Quantivity rates the Penn Lehman Automated Trading project papers I’ve enjoyed so much ? Maybe they don’t have enough hard maths to be taken seriously, but I rate Nevmyvaka et al on Optimal Execution.
Follow up comments on the post are interesting too. I’m intrigued by the strategies that firms like Getco are applying. They claim to be liquidity suppliers, so I guess they’re following some kind of market making, or perhaps, scalping approach. My guess is that it would be an automated version of what the Flipper did on Eurex. Of course such proprietary market making strategies are not constrained in the way that primary dealers offering govt bond liquidity on EuroMTS are constrained; there’s no requirement to make a two sided quote in minimum size with max spread for so many hours a day.
But that’s all just speculation. What I’d love to see would be worked examples showing order book state evolving as an algo trading strategy places orders and either allows them to execute to pulls them in response to book action. I’d expect to find more sophisticated versions of strategies like the one described here.
Lords of Finance
December 14, 2009
Got a copy of Lords of Finance as a birthday present at the weekend. I’ve been enoying the opening chapters hugely. The author, Liaquat Ahmed, has done for financial history what Anthony Beevor did for WWII with Stalingrad. Explication of grand strategy is interwoven with human detail to create narrative momentum. Strongly recommended…
Colossal failure
December 3, 2009
I’ve just finished reading Larry McDonald‘s ‘A Colossal Failure‘ book on the collapse of LEH. I greatly enjoyed it’s mixture of first hand experience of trading at Lehman’s with airport thriller style page turning narrative drive. The Jeffery Archerish rattling good yarn story momentum comes from Patrick Robinson’s ghost writing – Robinson is a thriller writer. The Lehman experience from McDonald is not just entertaining description of senior LEH people and their machinations, but also lots of good detail on the trades he put on.
Some of the Amazon reviewers have objected to the slightly breathless Dan Brown tone of the writing. It is a different approach to business writing, which is often too sober, boring even. There aren’t may comparable books, but I would mention Ferguson’s High Stakes, and Lewis’s Liar’s Poker. I wonder if McDonald has another book in him ? He could be the next Michael Lewis. Or maybe he’ll be too busy advising for a film project, because Colossal Failure would make a geat Hollywood movie in the vein of Trading Places or Gordon Gekko.
Max Slippage
November 4, 2009
Excellent article on execution slippage from Max Dama here. He’s writing from a prop trading perspective. Nice diagrams and charts in the piece as Max breaks slippage down into two components: liquidity impact and alpha loss. If we look at the problem from a Euro rates market making perspective we would consider slippage for hedge order execution on Eurex. We’d still have the liqudity impact component Max describes. Instead of alpha loss we’d have market risk for the time we carry an unhedged position. Of course, it’s a matter of market maker discretion how much risk to carry and for how long…
Sterling closes
August 28, 2009
The UK’s debt management office publishes closing prices calculated as an average of Gilt dealer prices here. One application of the prices is dealer execution of fund manager orders for execution at the close. The dealer and real money manager don’t know what the execution price will be when the order is placed, but that’s not a problem as the fund manager trusts the DMO price.
Coding the markets 