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Trading in derivatives slows to a trickle
By David Oakley and Sarah O’Connor
Published: November 23 2007 01:38 | Last updated: November 23 2007 01:38
Liquidity in some of the world’s biggest derivatives markets has dried up this week amid increasing fears over the health of the international financial system.
Over-the-counter trading in derivatives of equities, credit and interest rates have all seen much lower volumes as problems in financial markets have prompted investors to sit on the sidelines.
Analysts said flows had slowed to a trickle this week – even lower than in the summer when the credit squeeze was at its peak – as investor appetite for risk had diminished amid talk of potential bank defaults.
Although Thursday is typically slow because of the US Thanksgiving holiday, bankers said the week had been unusually light because of the growing fears that a big bank could go under as a result of losses in the US subprime mortgage and structured finance markets.
David Brickman, head of European credit strategy at Lehman Brothers, said: “Generically, trading volumes [in credit derivatives] are a lot lower than they were in the summer.
“The theory is that if people can’t trade bonds, they’re going to go to CDS [credit default swaps]. But in an environment like this you can’t get liquidity on single-name CDS either. That just leaves the indices.”
Another credit analyst said: “A lot of people have written off this year and hung up their boots until the new year. There’s no big bond issues in the primary market or activity in the secondary market. You can’t make money when there’s no liquidity.”
These markets are usually highly liquid, turning over huge volumes every day. Outstanding contracts in equity, credit and interest rate derivatives amount to $400,000bn, dwarfing the $60,000bn in the value of share trading on the world’s 10 biggest stock exchanges, according to the latest figures from the Bank for International Settlements.
Nino Kjellman, head of equity derivatives Europe at Deutsche Bank, added: “Liquidity has severely declined. In the current environment, appetite for risk is rare. Either people are sitting on the sidelines waiting for more visibility or, approaching year-end, they are reluctant to bet on risk.
“We see that investors are increasingly prepared to lower their risk exposure, which creates an imbalance and causes liquidity to dry up.”
Significantly, equity derivatives volumes have risen on the exchanges, such as Liffe and Eurex. Analysts said this was because exchanges tend to be used for hedging rather than speculative bets.
A contract at an exchange also has no links to the beleaguered banking sector; unlike a bilateral over-the-counter trade, when investors could lose all their money if the bank were to default, even if they were on the right side of the trade.
Interest rate derivatives volumes, including swaps and options where traders take positions on the monetary policy outlook, have also been sharply lower this week. The darkening mood was reflected in the underlying money markets and stock markets, too.
US interbank money market rates hit fresh record highs as they rose for a seventh day in a row on Thursday, according to the British Bankers’ Association.
Three-month dollar Libor rose to 5.03 per cent – 53 basis points more than the Federal Reserve’s benchmark interest rate of 4.5 per cent – the highest it has ever traded above the key US lending rate.
This week, the Dow Jones Industrial Average is down 2.9 per cent, while the FTSE 100 is 2 per cent lower.
Trading in derivatives slows to a trickle
By David Oakley and Sarah O’Connor
Published: November 23 2007 01:38 | Last updated: November 23 2007 01:38
Liquidity in some of the world’s biggest derivatives markets has dried up this week amid increasing fears over the health of the international financial system.
Over-the-counter trading in derivatives of equities, credit and interest rates have all seen much lower volumes as problems in financial markets have prompted investors to sit on the sidelines.
Analysts said flows had slowed to a trickle this week – even lower than in the summer when the credit squeeze was at its peak – as investor appetite for risk had diminished amid talk of potential bank defaults.
Although Thursday is typically slow because of the US Thanksgiving holiday, bankers said the week had been unusually light because of the growing fears that a big bank could go under as a result of losses in the US subprime mortgage and structured finance markets.
David Brickman, head of European credit strategy at Lehman Brothers, said: “Generically, trading volumes [in credit derivatives] are a lot lower than they were in the summer.
“The theory is that if people can’t trade bonds, they’re going to go to CDS [credit default swaps]. But in an environment like this you can’t get liquidity on single-name CDS either. That just leaves the indices.”
Another credit analyst said: “A lot of people have written off this year and hung up their boots until the new year. There’s no big bond issues in the primary market or activity in the secondary market. You can’t make money when there’s no liquidity.”
These markets are usually highly liquid, turning over huge volumes every day. Outstanding contracts in equity, credit and interest rate derivatives amount to $400,000bn, dwarfing the $60,000bn in the value of share trading on the world’s 10 biggest stock exchanges, according to the latest figures from the Bank for International Settlements.
Nino Kjellman, head of equity derivatives Europe at Deutsche Bank, added: “Liquidity has severely declined. In the current environment, appetite for risk is rare. Either people are sitting on the sidelines waiting for more visibility or, approaching year-end, they are reluctant to bet on risk.
“We see that investors are increasingly prepared to lower their risk exposure, which creates an imbalance and causes liquidity to dry up.”
Significantly, equity derivatives volumes have risen on the exchanges, such as Liffe and Eurex. Analysts said this was because exchanges tend to be used for hedging rather than speculative bets.
A contract at an exchange also has no links to the beleaguered banking sector; unlike a bilateral over-the-counter trade, when investors could lose all their money if the bank were to default, even if they were on the right side of the trade.
Interest rate derivatives volumes, including swaps and options where traders take positions on the monetary policy outlook, have also been sharply lower this week. The darkening mood was reflected in the underlying money markets and stock markets, too.
US interbank money market rates hit fresh record highs as they rose for a seventh day in a row on Thursday, according to the British Bankers’ Association.
Three-month dollar Libor rose to 5.03 per cent – 53 basis points more than the Federal Reserve’s benchmark interest rate of 4.5 per cent – the highest it has ever traded above the key US lending rate.
This week, the Dow Jones Industrial Average is down 2.9 per cent, while the FTSE 100 is 2 per cent lower.