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Let’s play a little game of “Real Life”
Let me dive into how policy & risk perception continues to trigger this reflexivity dynamic in the market itself.
Since Dodd Frank dealers do not inventory the same risk they once did.... lets discuss what takes place under the covers
Let me dive into how policy & risk perception continues to trigger this reflexivity dynamic in the market itself.
Since Dodd Frank dealers do not inventory the same risk they once did.... lets discuss what takes place under the covers
The dealer’s main job is to serve as a liquidity provider and facilitate trades when nobody else wants to.
Unfortunately when things go sour and everyone is “risk off”, they also now remove their hand from the market, more so due to the regulations on the banking side.
Unfortunately when things go sour and everyone is “risk off”, they also now remove their hand from the market, more so due to the regulations on the banking side.
Back in the day the trader could take on risk and warehouse it as positions go against him. In today’s day and age, risk managers are much more stringent and they force the need for traders to maintain a matched book... this is what initially triggers the cascade effect.
As dealers are quicker to exit positions, they pull liquidity and contribute to the avalanche as they try to stay compliant and keep their matched book in line. You can see how this is counterintuitive.
Every night my team and I had risk levels we needed to stay under... this was predicated on overall delta/ gamma/ vega notional .... If you were over by a hair it would constitute as a “breach”....3 breaches in your career and you are automatically fired... no questions asked.
The risk manager, compliance, my MD (head of trading) and myself all did not want to get fired. So once 3:30 PM came, you better believe we made sure we were under those numbers even if the world was coming to an end. Didn’t matter what your view on markets were, JUST BE UNDER!
This is why what we do at Ambrus is predicated around short tenor. When these moves happen, it’s a rapid reaction that takes place street wide in a very compressed time frame due to the structure of the policy that dictates the rules itself.
The role of the chef is to prepare the food, not eat it. The restaurant as a whole can’t function if the chef is in the back eating every meal he makes when he gets hungry.
