Credit Volatility Takes Toll on CDX and iTraxx Liquidity

--Trade clips have also fallen on CDX. “Trade clips are very small, say $50-75 million on CDX HVol and $100-200 million on IG,” “You could usually do $250 million in IG8 at a clip but that’s not too common in the last week and half. We certainly haven’t seen the big $1 billion trades in that time.” Credit Volatility Takes Toll on CDX and iTraxx Liquidity Chaotic trading in credit has put severe pressure on index liquidity, according to CDX and iTraxx traders. The bid/offer on iTraxx Crossover – normally the most-traded of the three main European credit derivative indices – widened to two basis points, and reached 3bp in widening bouts. Dealers say that while European desks might have traded blocks of up to €700 million in the early part of July, ticket sizes then dropped significantly. “People are unwilling to do anything in size unless they are axed at certain levels,” says one dealer. “You get used to a level of liquidity when spreads aren’t moving, but in this volatility no-one is going to start showing large size at a tight bid/offer. It doesn’t make any sense because you’ll never get out of it and the Street moves very quickly. “It is one-way traffic sometimes and you can get burnt pretty badly,” he says. “If Crossover moves 10bp and you’re on the wrong side in €100 million that’s €450,000 down the pot.” Liquidity in CDX XO index has looked worse than its European counterpart, with bid/offers reaching 5bp. “That should not be taken as a bench mark as it is pretty awful, to be honest,” says a London-based trader. “CDX HVol’s bid/offer has been consistently about one apart, although it did get to two when we had a really big move.” Trade clips have also fallen on CDX. “Trade clips are very small, say $50-75 million on CDX HVol and $100-200 million on IG,” says an official at interdealer broker Phoenix Partners in New York. “You could usually do $250 million in IG8 at a clip but that’s not too common in the last week and half. We certainly haven’t seen the big $1 billion trades in that time.” Adds Gary Jenkins, portfolio manager at Synapse Investment Management in London: “It might feel like it’s not very good liquidity because of the size of bid/offers, but the truth is that, compared to what would have happened in credit before the Crossover, liquidity is very good. We’re in some of the most extreme volatility ever seen and it is very difficult to put a definite price on things when it’s moving so quickly.”