Emerging Markets Trading - Questions
(Monkey, 30
Points)
on 4/30/10 at 1:06pm
Hello Guys,
One q: Can somebody please explain what EM traders do? I know there will be some ppl who would point me in direction of another thread or would bash my question, but all I am trying to do is to learn. All I want is the description/ example of what they trade (e.g. product or range of products); are those products liquid; how many countries / products one trader can handle; can you trade derivatives at em ( I really don't know, so excuse me for this q) or any other insights would very helpful.
Thanks everybody.
bump. someone should help
bump. someone should help this fella. would if i could. what kind of place are you talking about btw, OP?
i would also appreciate hearing from someone on an emerging markets desk...
Sat on an EM desk this past
Sat on an EM desk this past summer. At this BB, EM traders trade rates, bonds and their derivatives, and currencies and their derivatives of EM countries - basically everything except commodities and equities. In NY, the focus is on LatAm, mostly Mexico and Brazil with a little bit of the other Latin American countries sprinkled in. Russia, Eastern Europe, South Africa, and the Middle East are handled by European desks, while EM Asia (India, China, etc) is handled by Asia desks. Traders typically traded only one of the three products, and might even focus specifically on one particular country. Yes, you can trade derivatives - lots of sovereign CDS traded, as well as currency options.
I'm a macro trader/strat, but
I'm a macro trader/strat, but started my career trading EM. Firstly, you clearly need to do some research on your own. If you're starting on an EM desk, you can learn a lot before showing up just by using google.
Anyway, emerging markets traders can cover many products and focus on 1-4 countries in which they make markets, or they can trade 1-2 products and cover many countries.
Let's say you're an EM currency trader. You will probably be split into 6 or more desks: Asian deliverables (HKD, SGD, THB), Asian non-deliverables (CNY, TWD, KRW, INR, IDR, MYR, PHP, VND), Eastern Europe (PLN, CZK, HUF, RON), MENA (SAR, OMR, AED, JOD, MAD, TND), Exotics (KES, BWP, NGN, LKR, PKR, etcetera), and LATAM (BRL, COP, PEN, MXN, etc.). Turkey, South Africa, Isreal, and Russia (and places like Ukraine & Belarus) might get lumped into one of the above groups, or may be traded by a specialist who focuses on 1 or 2 of those countries.
In the vast majority of EM countries, there are capital controls of some sort. In places like Asia and Latin America, it's very hard to put your hands on local currency, so you can't trade spot, forwards, swaps, cross currency swaps, or any other instrument that requires physical delivery of cash unless you are an 'onshore' legal entity. If you are an 'offshore' legal entity, you must trade non-deliverable forwards (NDF) and non-deliverable swaps (NDS). This is true of all of Asia except HKD, SGD, THB, and RUB. The first three trade as G10 currencies do. The RUB is a convertible currency, so you can trade both deliverable and non-deliverable forwards and swaps. All of LatAm trades as NDFs except MXN, which is a 'normal' currency.
In most countries that trade as NDFs, there exists an onshore forwards market that can diverge significantly from the offshore NDF curve. The main reason for this is simple: non-deliverable forwards are contracts for difference that net-settle in USD (or some other major currency like EUR or GBP). As such, they represent the market's perception of the spot price in the future. On the other hand, deliverable forwards and swaps are calculated as the net present value of the interest rate differential between the two currencies in question discounted back to today. The divergence between the offshore and onshore curves is called 'basis' (there are many forms of basis risk, so don't think this is the only type), much in the same way that G10 currency futures can diverge from G10 outright forwards.
In countries with deliverable currencies and fiscal deficits, you can sometimes trade external debt. In the EM space, governments are reluctant to issue loads of debt to foreigners. If, say, Turkey wants to issue debt (they do), then most of it will be offered onshore, and only a portion will be offered to outside investors. Any time there is a government debt issuance, there will be people (the government itself, for instance) who will want to swap their fixed income stream (the coupons) for a floating one (Tribor + xx bps for Turkey), so there will be an interest rate swaps market (both a traditional uni-currency fixed-for-floating swap and a cross-currency swap market).
Further, through purchasing any form of government debt you expose yourself to the risk of a sovereign default (which is considerably higher in most EM countries than in most developed ones), there is a market for purchasing protection against the risk of default. Thus, the credit default swap market exists for sovereigns in the EM space (as well as within the developed market).
There are a limited number of currency and interest rate futures traded within the EM space, but the loan and depo markets exist for all of the deliverable currencies. Given the lack of IR futures for most of the EM space, currency forwards/swaps are used to determine the short rate curve, and the implied yield on the currency swap should be roughly equal to the rate charged for a loan or depo (you can, of course, widen your prices for any reason you like).
Moreover, you can trade options on most of the products I described above. USD/KRW (Korean won) options, for instance, use the USD/KRW NDF rate as the strike instead of the forward rate as would happen in deliverable currencies. As a result, rho is a bit larger (all other things being equal) for EM non-deliverable currency options than for EM deliverable currency options, because you can't directly hedge your interest rate risk. Additionally, swaptions within the EM space aren't uncommon, though the market isn't huge. The two largest EM swaptions markets are probably TRY and ZAR.
Finally, some EM traders also trade equities. Depending on the bank, EM equities may be housed under either equities or EM. I think the latter makes more sense, since there are a lot of rules involved in investing in emerging markets, and generalist equity salesmen are unlikely to know all of said rules without being deeply involved in the space.
I am not even going to talk about liquidity on a product-by-product basis. I have given you WAY more material than I knew when I joined the desk, so I am expecting a BJ later.
You're welcome.
That much info deserves two
That much info deserves two silver bananas.
"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."
Brotherbear, Sandy_Riprock
Brotherbear, Sandy_Riprock
Thanks ALOT. I really appreciate it. Special thanks of course goes to Brother Bear. I will need to digest that info and probably ask some more qs that some users of this forum will bash. Anyway thanks a lot. I would give you as many points as I could but I have no clue how to give 'em here.
And final thanks.
well done brotherbear. but
well done brotherbear.
but wow so much of that went above my head. i'll have to re-read several times and ask people questions...
ps i think you Should talk about liquidity on a product by product basis.
yeah, I would agree w/
yeah, I would agree w/ islandoffmorocco about liquidity.
brotherbear, If you have some time when you are not busy, lecture us on liquidity on a product by product basis, please.
Thanks a lot in advance
[x]
[x]
Brown_Bateman: Hey man, Can
Brown_Bateman:
Hey man,
Can you share some of your experiences, please?
Thanks
Not sure how useful my
Not sure how useful my experience would be. As I mentioned above, I spent last summer interning in a BB FICC division of one of the 'exotic' countries listed by brotherbear above ((KES, BWP, NGN, LKR, PKR, etc. The branch focused on trading that countries denominated currency, government bonds, and money market securities. Spot FX transaction sizes were a lot smaller than the size traders dealing in bigger currencies would trade in London/NY etc. Also, while there may have been offshore trading of NDFs and other derivatives by offshore entities, traders in various banks onshore mainly dealed in the spot/cash markets.
The yield curve was only liquid up to 6 months. While short, this curve was still quite steep with rates ranging from 100bps overnight to 900bps 6 months out. To put this into perspetive, USD 6m LIBOR was around 45bps.
Spot FX was about 60% client, 40% prop, while cash goverment bond trades were around 90% prop, 10% client. The local corporate bond market was yet to take off but this may change soon as there were some local companies who began to tap into the bond markets with one raising about $250mm IIRC. Due to capital controls, the spot fx clients were all onshore entities such as oil companies loking to trade the local currency for usd and vice versa, and big multi-national companies. Traders had to deal with a lot of constantly changing government rules on securities trading to quench the volatility in the markets at the time. An example was a rule stating the maximum currency exposure a bank could have was limited to x% of shareholders funds, with the number x changing at different points over the summer I was there.
The bank did not trade any derivatives while I was there.
As for my experience in a London BB EM trading desk, it was just a few days shadowing experience not really worth commenting on.
Excellent posts above. I also
Excellent posts above. I also did a stint on an EM trading desk and just wanted to point out that some traders also focus on credit (particularly credit default swap indices, sovereign CDS and local CDS) as well as a few commodities such as copper and oil.
Thanks a lot guys. Gimli, can
Thanks a lot guys.
Gimli, can you talk more about your experiences, please. Especially about credit.
Thanks
A Emerging market trader
A Emerging market trader could possibly trade multiple products in a 1-4 countries?
Exclusive8, Yes, an EM trader
Exclusive8,
Yes, an EM trader could be (and most of the time is) a multi-product trader. If you trade interest rate swaps in, say, Turkey, you're probably going to trade government bonds/external debt, currency swaps/forwars, and probably spot FX as well. In addition to trading local rates (TRY interest rate swaps), you will probably make markets in cross-currency USD/TRY, EUR/TRY, and TRY/ZAR swaps.
If your firm doesn't follow this model, then you will probably focus on one product, but trade it across several countries. If you trade, say, Asian non-deliverable forwards, the head trader will probably trade CNY, TWD, KRW, and INR, whilst the junior will trade IDR, MYR, PHP, and VND (since those books are worth less than the first four I mentioned).
As it concerns liquidity, let's start in Asia, and move west:
In all Asian NDFs, the liquidity period is the 1-month NDF. In CNY, you can usually get quotes through the brokers out to 2 years, but the vast majority of speculative trades are done in the 1-month bucket. I have seen CNY forwards trade out to 6 years. Anything beyond 2 years out, you need to start trading the NDFs like deliverable forwards, because the risk is that China liberalises its currency regime, and the currency becomes increasingly convertible over time. Out to 1 month, you can probably do $100 Mio of USD/CNY NDFs without moving the market much so long as Asia is trading. Once Asia goes home (around lunchtime in London), liquidity dries up a bit, and you can probably do about $50 Mio until London goes home. To be honest, NY doesn't have much of a presence when it comes to trading Asian EM markets, so the pricing is wider during New York hours, and the liquidity is worse than in London.
In TWD, KRW and INR, you can get prices out to 2 years (most of the time) through the brokers, and always if you are looking for a price less than 1-year out on the curve. A lot of the time, in these currencies, people trade the 12 month outright forward, and if they like the longer end of the NDF curve, will trade the 12 month - 18 month or 12 month - 24 month forward-forward. Each of these three has become much more liquid as the credit cruch has abated, and whilst it used to be tough to do $50 mio in the 1-month NDF, you can probably do $75 Mio out to 1-year without abusing the market much.
In PHP, VND, IDR, and MYR, the markets are significantly less liquid than the 4 major Asian non-deliverables. Of these 4, VND is the least liquid, followed by PHP, followed by IDR, followed by MYR. In Vietnam, you can get prices out to 6 months (maybe), and can probably do up to $5 Mio, but the prices aren't going to be great. PHP is basically the same as VND, but fixes 1 day before maturity instead of 2, and trades (sporadically) out to 1 year. I wouldn't be too comfortable quoting anything beyond 3 months in either VND or PHP, but I would if I had to. IDR and MYR have nice volatility, and are at least reasonably liquid in the 1-month tenor. I have never seen a price in any of these 4 currencies beyond the 1 year tenor.
Before moving on, it is worth noting that whilst there can be a great deal of basis between onshore and offshore forwards in all of the Asian NDFs, it is nearly non-existant in KRW, as it is fully arbitrageable by the Bank of Korea (who is legally allowed to deal in both the onshore and offshore markets), so the NDFs in Korea trade exactly like deliverable forwards.
Now, you can do options on NDFs, and you can do non-deliverable swaps (basically two NDFs on the opposite side of the price) on each of the 8 currencies listed above. Just as in the outright forwards, corporates have the most interest in CNY, followed by KRW, INR, and TWD (probably in that order). The implied vol and vol-of-vol has come off a lot in the last year. I want to say that implied vol on the 1-month USD/KRW riskies was at 9 (ish) today, whereas the same pair was trading above 20 a year ago (I think around 24). Because the most liquid period for the NDFs is the one-month, that also happens to be the most liquid tenor for the options market. There is quite a lot of risk in EM options pricing because the diffusion process isn't continuously differentiable. In the EM space, the risk is always that the EM currency devalues, and there is considerable jump risk surrounding events. As such, Black-Scholes doesn't work as well, and volga-vanna models are inadequate. The farther down the NDF curve you travel, the wider the bid-ask is going to be, and the riskies are generally going to favour a depreciation of the EM currency.
In deliverable Asia, you can do nearly unlimited size in HKD without moving the market much. HKD will trade out to 5 years without much difficulty. You can do cross-currency swaps (generally generated from origination teams in DCM), regular currency swaps, forwards, forwards of forwards, loans and depos, spot, and options. The HKMA keeps a currency board that regulates price movements. USD/HKD can only move between 7.7500 and 7.8500, and the volatility is nearly non-existant at the moment (not necessarily true all the time). In spot, you can probably do a yard ($1 BIO) without moving the market more than 20 or 30 pips. I mean, you could just try to destroy the market, but that's not 'best execution,' and you're not going to keep your clients happy in doing so.
In SGD, the MAS runs a quasi-peg to a basket of currencies. Each bank has its own NEER or REER to predict USD/SGD manipulation given movements in EUR/USD, GBP/USD, USD/JPY, and a few other currencies. You can probably do $50 Mio in the spot market and get a price 20 pips wide. In the short-dated loan/depo and swaps markets, you are going to have a hard time finding liquidity after Asia goes home, so you may have to pay above the implied yield to cover your positions (if you're short SGD in New York, for instance).
THB is clearly the least liquid of the Asian deliverables, and I am fairly sure than you can't keep balances of more than 300 Mio THB on your books at any one time (if you are an offshore entity). I don't know that much about THB because I don't normally trade it, and they have a coup every few years, so I don't think it trades too far out on the curve.
I don't feel like typing much more. If I feel up to it, I might spend some time talking about EMEA and LATAM later.
^ thank you
^ thank you
brotherbear, Man, just two
Brotherbear, I was wondering
this thread should be put on
Really great isn't it?
by wrote: Brown_Bateman: Hey
I win here, I win there...
Do the NY/London desks also
ggsonny wrote: Do the