LIQUIDITY AND MARKET STRUCTURES Eric Bushell, Chief Investment Officer Signature Global Asset Management
AGENDA 1) Regulatory reform - Volcker Rule - New risk weights for trading assets - Dealer adaptation 2) Changes to exchange trading - High-frequency trading - Smaller orders, higher volume - Overwhelming the system 3) Impact on market participants - Higher costs - Lower liquidity - Higher volatility 4) Signature’s approach - Expect market dislocations - Be a liquidity provider
Source: Bloomberg LEVERAGE LIQUIDATION SWAMPED MARKET CAPACITY
VOLCKER CLOSES THE CASINO IN DEPOSIT TAKING INSTITUTIONS
Source: International Monetary Fund BANK CAPITAL CHARGES WITH NEW RISK WEIGHTS
DEALERS’ WAREHOUSE CAPACITY SHRINKS
Source : Citi Volatility to increase U.S. CREDIT FUNDS VS. DEALER INVENTORY
Source: Morgan Stanley DEALERS ADAPT TO NEW REGULATIONS
RISE OF ELECTRONIC TRADING ALGORITHMIC TRADING SPLINTERS ORDERS
Source: Bloomberg RISE OF ELECTRONIC TRADING BLOCK TRADES % OF U.S. TRADING
Source: Bloomberg TRADING VOLUME BY INVESTOR TYPE
Source: Bloomberg EXCHANGE MARKET SHARE OVER TIME
CI SPONSORS EXCHANGE COMPETITION IN CANADA
Leverage ratio hurts bond liquidity Wall Street to exit commodities trading OTC derivatives overhaul More margin (cost) for users WHO IS NEXT? – COMMODITY AND DERIVATIVE MARKETS
INVESTMENT IMPLICATIONS Expect market dislocations Be a liquidity provider Seize scarce liquidity events Be tactical – active Structurally high cash levels
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