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Home » Market Structure » eTrading Bonds, US CDS, Virtu Financial

eTrading Bonds, US CDS, Virtu Financial


Matthew Leising, Bloomberg, Deutsche Bank Said to Propose Creating Bond Platform With Rivals, here.

Most trading takes place through privately negotiated transactions. Corporate bond dealers and investors have started to branch out into electronic-trading platforms as they seek to cut costs and improve their ability to convert investments into cash amid the new capital rules.

Goldman Sachs Group Inc., the fifth-largest U.S. bank by assets, has expanded its GSessions electronic-trading system. BlackRock Inc. (BLK), the world’s biggest asset manager, decided this year to route some of its trades through MarketAxess Holdings Inc. (MKTX)’s computerized system.

Bloomberg LP, the parent of Bloomberg News, offers trading of bonds and credit-default swaps through its fixed-income trading platform.

Matt Levine, Bloomberg, Why Would Anyone Buy Credit Default Swaps on the U.S.? here.  Recap of an old A Credit Trader post.

Fortunately, CDS contracts are full of structural nonsense! The main piece of structural nonsense is the cheapest-to-deliver option: When a government defaults, the CDS contract allows its owner to deliver any bond of that government and get back 100 minus the value of that bond.** So you find the cheapest bond, you buy it, you deliver it into the CDS contract, and you get back 100. If the cheapest bond is cheaper than 100, you make money. (It is!)

The cheapest-to-deliver option exists for historical and liquidity reasons, but is sort of weird in practice. It is so weird that people who write about CDS often forget it. People who trade CDS do not. To a second approximation, the entire value of a CDS contract on the U.S. government is made up of the value of that cheapest-to-deliver option.

Arash Massoudi, FT Alphaville, I see your millisecond study, and raise you my millisecond study, here. Hahaha, Virtu says Nanex Research, Einstein and The Great Fed Robbery uses SIP timestamps, oh the  ” and just before it happened my calculator broke” shame of it all. Adding Nanex to the Squeezing The Cold Product List (tag:squeezers)… now. I just sawthe Vrtu CEO purchased the Florida Panthers and is  moving to Florida.

Why is Nanex wrong?

Nanex unfortunately relies on the embedded timestamps of the SIP. These timestamps are SIP times (based on a clock operated by the SIP) and can be flawed as a result of (1) travel times from the exchanges to the SIP data center (The SIP for SPY is NYSE located in Mahwah); (2) the SIPs clock being skewed; and (3) the randomness of the SIPs processing capacity and timestamping. This is especially revealing in the Nanex charts where your see the SIP processing groupings of trades from each exchange rather than processing trades from various exchanges in random orders.


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