Cds index trading strategies
The now-notorious JP Morgan Index and Company NYSE: It all seemed to start in early Trading. Hedge fund players in the opaque market trading synthetic credit-default swap instruments CDS complained to the Wall Street Journal and Bloomberg News that a trader at JP Morgan's U. The people who spoke to the media had no trouble identifying who the trader was -- the market for synthetic CDS instruments is not very liquid, still mainly traded on a person-to-person basis -- and pointed to an until-then anonymous Frenchman named Bruno Iksil as the force behind the bets. Here's what the hedge fund players said was going on: Iksil was making a positive bet on the CDS market through a round-about route, selling insurance against default on a basket of North American investment-grade corporate bonds. In other words, Iskil was betting that the price of corporate bonds would rise. His activity was noticed because cds was not actually selling insurance on each specific item in the basket, but funneling his cash through an instrument linked trading the Markit CDX. NA Index, a benchmark measure of the credit-default swap market. On their own, those trades would have indicated Iksil was making a bullish bet on the corporate bond market since the price of insurance against default moves strategies the opposite direction to the value of corporate bonds. Iskil could have bought strategies that protection and pocketed the profit, strategies the bond market rallied. His bet was hedged, meaning there was a counterbalancing opposite trade that was supposed to soften the blow if the market moved against him. That hedging consisted of buying index instead of selling -- protection for bonds of some financial institutions that themselves underlie the CDX. JP Morgan insisted the trade was not a directional bet hoping the market would go one way or index other, but a way of protecting the bank against other outstanding bets made on behalf of clients and noted elsewhere on its balance sheet. Others speculated the move could be a bet not necessarily meant to rely index movements within the corporate bond market, but more linked to interest rate changes. At least one bank analyst also suggested the whole charade was just a way for JPMorgan to smooth out counter-cyclical accounting losses it would be forced to report if the financial markets continued to recover into But regardless of what JP Morgan cds others said, it was clear the bank stood to make a profit on the spread between instruments linked strategies the CDX Index and the index itself -- a spread the activities of the bank itself created. And that made trading market mad. Traders began pejoratively referring to Iskil as the London Whale and Voldemort and lampooning his strategy on the front pages of the financial media. Then the market got even. Traders began to take positions that assumed Iskil's trade would unravel -- and cds the circular logic that sometimes pervades asset cds -- precipated that outcome. The spread JP Morgan was depending on to make a strategies evaporated. I view the entire index as a chess match playing against this guy, an unnamed trader told the Wall Street Journal on April JPMorgan had been backed into a classic zugzwang -- in which the best move is no move -- and stopped purusing its trading strategy. It could have probably weathered the storm, which it dismissed as a complete tempest in a teapot, had it found willing counter-parties to keep doing a lesser-volume version of the trade. But by then it was too late. Iksil's positions collapsed when he was unable to find counter-parties to its massive bets. Traders work in the JP Morgan company stall on the floor of the New York Stock Exchange in New York July 15, REUTERS The now-notorious JP Morgan Chase and Cds NYSE: Exclusive articles delivered to your inbox daily. Darwin Martinez-Torres was arrested by Virginia police during the search for Nabra Hassanen. IBT About Us Advertise with Us Media Kit Terms of Service Privacy Policy. Editions Australia China Trading Italy Japan Singapore United Kingdom United States.
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