NuclearPhynance Archive

cash is the real product, cds is a derivative that some participants find useful. I have never worked on a flow desk, but anecdottaly bid offer pnl was very low in both bonds and cds in the run up to the crash - clients pretty much had choice markets in everthing. This put more emphasis on the structured products market because it was the place some credit franchises could BOOK sizeable pnl (emphasis on BOOK because at some places it was only pnl from some bullsh** accounting model). Structured products with mainly synthetic underlyings made up a big part of the derivative market, and post crunch this part of the market is much much smaller, hence the market focus switches back to what it is real about which is cash trading (again this is anecodotal as i dont have cds volume stats, but im guessing the data would be bad anyway because a few years ago im not sure everything was cleared/matched in dtc). 09 was a massive year for cash - huge issuance, huge demand.



In the past few weeks I suspect what you have seen in credit cash is the typical result of retard dealer thinking - "I need to run some inventory to provide liquidity for my clients". Translation: I like owning 1bn of L+150 bank paper for the carry as i get billed at a funding rate of L+20 (despite the fact that away from deposits my bank raises wholesale at L+200), and if this makes money i am a good "trader" but if it loses money im going to shrug my shoulders and say its just a cost of providing liquidity to clients. And then it tanks 5 points on the nice stuff and 15 on the nastier



[Edit: post edited to delete rant!]

Kanga> Thanks a ton. Thats interesting that credit flow becomes more about market-making during downturns. Would you say that in the run up to the crash when bid offer pnl was low, most desks focused more on prop?

Yes. There is a natural tendency to shift towards prop (and structured trades) when the returns on the flow business fall. I think its probably already started and Im hoping it ramps up further soon, although there are regulatory issues with prop at the moment and this business cycle could unfortunately be rather truncated...



Flow/liquidity provision is like any other strategy, too much capital and the returns diminish and in the downturn competition shrank with dealers going bust/others getting their risk capital slashed. The real money in the bust came from captive clients who had to trade and the only place they could get liquidity was from dealers. This doesnt make you friends in the long term, but a lot of the people liquidating are not around for the long term, so dealers taking 5-10+ points out of blocks of 25-50mm and you quickly rack up pnl. Thatd be my guess as to how the major flow credit franchises did over a bn pnl a year.

Kangaxx



"There is a natural tendency to shift towards prop (and structured trades) when the returns on the flow business fall."



I'm a bit surprised that statement. Is it relatively easily for flow traders to take prop positions? I would think that middle offices would at least try to distinguish between flow and prop positions.

Maybe call the desk you will be working on and ask them? Flow desks can be quite large.



Also read Parkinson's Law: The Pursuit of Progress.

Whats the difference between flow trading and prop trading if the flow traders can held what inventory they like?