So there are many equity websites out there, Schwabb, etrade, Interactive Brokers, etc. They are great equity and equity option platforms.
Does anyone know if individual investors can trade CDS or corporate bonds? What are the liquidity spreads like for bonds?
How to Trade CDS as a Retail Investor
Trading bonds as an individual with a regular brokerage account is typically accessible since the principle on these tend to be within the means of most retail investors. However, CDS is more difficult as notional values on these contracts tend to be closer to several million dollars. These high buy-ins make CDS trades unattainable for most individuals.
Further, CDS are over-the-counter (OTC) trades, meaning they are traded via a dealer network opposed to on a centralized exchange so you would need to have a close, working relationship with a major financial institution in order to do CDS business with them. There is the potential to buy-in with secondaries however, there is still the high buy-in barrier. There are very few individuals who are able to make these sorts of investments.
As user @Marcus_Halberstram explains:
CDS protection is only as good as the creditworthiness of the counterpart writing the protection.
So as an individual, it is technically possible to trade in CDS but with a high principal and difficulty accessing the opportunities, there are some pretty serious barriers to overcome.
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You can trade bonds with a regular brokerage account since the principal on most of them are within the means of a retail investor but CDS is a whole other story. Notional values on CDS contracts are typically upwards of many millions of dollars, so unless you've got some pretty deep pockets, trading CDS is not very accessible to a retail investor. In addition to that, CDS is written OTC so you'd have to have a pretty close relationship with one of the major financial institutions to do CDS business with them. You could always try to buy in the secondaries (not sure how this works exactly) from a HF or something, but again, the notional values are typically $5 million+.
You're also limited in the type of exposure you can take on since there are VERY few individual investors who are capable of writing protection. CDS protection is only as good as the creditworthiness of the counterpart writing the protection.
If you're trying to get short fixed income exposure, why not find a bond ETF and either short it or buy puts. I'm also will to bet there is some sort of ETF out there that itself takes a short position on bonds.
Feel free to supplement/correct what I've said , I'm admittedly no expert on FI/CDS trading.
I think what Marcus said is pretty accurate. In Michael Lewis's "Big Short" he talked about a small investment group and said that it was pretty hard for them to get CDS and had to work really hard to get a contract with a BB. My guess is that it is even harder for an individual.
Either way, DON'T GIVE UP! If you want to do, find a way. BUT, be be prepared to not only loose your shirt, but your pants too if sh*t goes sour!
Short answer - yes, individual investors can but you never will (not as an individual anyway). It depends on the bond but most vanilla rates can be had for a few bps.
http://www.markit.com/en/products/data/indices/credit-and-loan-indices/…
What effect will the new CDS exchange have on interdealer brokers? (Originally Posted: 03/09/2009)
Credit derivatives have been a pretty lucrative product for interbroker dealers since all of the transactions are conducted OTC. How badly are all the interdealer brokers (mainly ICAP, GFI Group, Tradition, Cantor Fitzgerald, etc.) going to be hit once the CDS exchange is finally launched?
Business in single name CDS issues will probably see significant decreases but I imagine that the more complex, exotic OTC derivative products will still require interdealer brokers?
Curious about this as well
anything that becomes more standardized has a reduced margin - as dealers see that, so will IDB. Not that an IDB really gives a shit (until their customers go out of business), but it will also reduce counterparty risk.
Margins will contract but I expect volume to pick up tremendously once a more transparent market exists. With transparency comes liquidity. Also Remember that the brokers offer bits of information that an actual CDS exchange cant and in addition they could allow for a very large block to be crossed with a counterparty. Credit brokers could become more like execution brokers in more liquid products such as equities, FX, and Futures.
I imagine though that the way CDS is traded would be very different just because of the additional money that you would have to put up front for the same exposure.
For example on an IG CDS right now you might be paying 250 bps on buy protection. Once these CDS trade on the CDS exchange though you're going to have to put down additional upfront margin. So would you be looking at prices now on CDS looking more like 1 + .25 bps, 1mm upfront plus 250k per year? In that case I would imagine that market participants may just want to trade the underlying cash bond instead.
John Nixon, CEO of ICAP North America talked about the probable outcomes for the firm upon the institution of a clearinghouse/exchange. I suggest you all check it out.
good find max
Future of CDS trading from a buy-side perspective (Originally Posted: 10/09/2011)
Heard banks will be reducing CDS flow trading, is it still a good area to be in?
I mean, from the buy-side perspective, are there profitable trading opportunities in this area? Are there money to be made? Is it worthwhile to start a career in this area? Is it a dying field? I mean if nobody trades CDS and if governments ban CDS trading, will I be in a wrong career field? (I am joining a buy side credit fund trading CDS)... On the other hand, hopefully my knowledge in corporates and fixed income will still help me even if in the future I have to switch to equities or global macro, etc
Could anybody please shed some lights on me?
When you are talking about cds trading. What products are you talking about? Corporates, mortgages, sovereigns?
Mainly corporates, ... but I would guess the buy-side fund won't have a boundary for me to explore, as long as I can come up with ideas and profitable strategies...
u know they are like stocks just alot less liquidity right....shouldn't be that hard to "trade"
I disagree with your statement. Because of the lack of liquidity you have to pay attention to risk much more.
During my internship. a lot of the traders on the desk traded cds products (was on a fixed income prop desk). Although you have a few European nations wanting to ban cds trading on sovereigns I don't think that it will happen. I personally think that it is a good field to be in. Unlike equities or spot fx all cds trading is otc, therefore it is harder to automate.
I personally think that you have a pretty sweet gig.
DENNY CRANE
To the OP: CDS are, and will continue to be a valid financial instrument, but I wouldn't be shocked if regulators eventually banned naked CDS and brought them more in line with traditional insurance policies. If that happens, the effect is probably the same from the perspective of your question, which is to say there won't be any speculator volume, which means the gig you're signing up for wouldn't be needed under those circumstances. (unless you want to be an insurance salesman). That said, I'd still take the job. I don't see that regulation on the immediate horizon, it's good exposure, good experience that is relevant in other areas of banking, and gets you exposed to C-level corporate finance folks.
I personally don't see why the governments allow buying CDS on assets you don't own. Doing that creates an incentive to CDS buyers to hammer the asset - kind of like buying fire insurance on someone else's house. I also don't see how naked CDS buying somehow manages risk - to me, yes it may reduce day-to-day volatility of your portfolio, but the systemic risk becomes unbearably huge, making it prone to a black swan event (notional value of 250 trillion concentrated in 5 banks, was it? scary.)
That said, I don't think governments will ban CDS trading outright, but clearly they will enforce a central clearing system of some kind. I'm not completely sure about the implications of that though. Perhaps it would boost liquidity, so it may be a good thing.
I think I dun got trolled
Lol. So much garbage posted up above. If you dont know what the fuck youre talking about, dont post.
A recent study by the ECB (of all places) has found the 'tail wagging the dog' scenario doesn't hold w/r/t CDS and the underlying. Secondly, for liquidity - theres more than enough in there to get 10mm clips off at a decent price not far away from b/o, especially in index CDS - no matter if SovX the most popular or less popular mortgage, CMBSs, etc. Finally, the only issue i can add where transparency is needed is in very light regulation akin to TRACE for bonds on the bbg machine. Knowing who buys what and what, a la central exchange, would be a benefit to all participants. Especially since about 65% of this market's participants are dealers and truthfully a very small amount of the CDS market us thanks to HFs.
haha blastoise
CDS Trading (Originally Posted: 04/16/2012)
Hey guys,
anyone got insights when it comes to CDS trading? I have an interview coming up for an intern position on a CDS trading desk...
Cheers
Congrats on the interview-- any specifics you were wondering about?
Saw this a while back, might be useful depending on your level of knowledge of the area.
http://www.zerohedge.com/news/visual-simplification-cds-market
thanks... i know what a cds is and how it works. but id like to get a little more insight on the technicals. to what extent is modeling used? what sort of questions should i expect? i guess there will be at least one question on europe and one on the subprime crisis.
You might want to read up on CDS pricing, default intensity, etc. Also know the big CDS indexes. Know what types of positions CDS synthetically replicates (asset swap - long bond with a IR swap). Know the common CDS tenors. Why might an investor prefer to get credit exposure through CDS vs other credit instruments.
Hey guys, I ended up not going to the interview since I received an offer from another bank.... If anybody wants some guides to credit derivatives please get in touch via PM. Don't know how to attach them to this post...
CDS Trading Advice (Originally Posted: 10/31/2016)
Hi all,
I've got a meeting with a senior CDS trader booked in and am quite new to the product. Has anyone got any general advice about the area/good questions to pose/topics to engage in? I am well up to date on general macro news, but don't know tonnes about CDS trading so any help is useful. Thanks!
ask if he was long during 2008
I worked closely with CDS traders when I was in risk management so I can possibly help out a bit here.
"CDS Trading" is a broad term to ask about. The product is used in many ways, but most commonly to hedge credit risk in fixed income portfolios. CDS's are also very commonly used in prop trading using arbitrage strategies (note that a CDS can be constructed using corporate bonds and treasuries, as well notice the presence of standardized CDS indices), even after 2008.
There are many great resources on the topic of credit default swaps. Unless you have a fairly mature understanding of math you probably won't understand how they're priced, but you should know what drives credit spreads prices.
Ask questions on the trader's strategy, where (s)he feels the credit trading industry is going given the push for technological innovation (will these ever be on exchanges?), and what the average day-to-day's like for a credit trader. Ask about regulation too - I've heard of some credit derivative traders who actually managed to find arbitrage opportunities that came out of regulations that were meant to strangle the business into submission. This can lead from a conversation on standardization in the CDS market and how it's impacted business. Google "SNAC credit spread".
In my experience the people on credit derivative desks have been the coolest ones on the floor (a good mix of smart business people and geniuses with PhD's, all of whom are very humble - this was probably different prior to 2008, but I was still in school back then so I wouldn't know).
Make sure you look up Markit CDX. There are a few great resources on the Markit website that explain the gist of what you should know about credit derivatives in industry today.
CDS on Exchanges, thoughts? (Originally Posted: 10/14/2008)
With the CME and Citadel teaming up to list CDS, and with banks unable to contest this effort, it appears we are going to have CDS listed by early November. This is a huge market and it would be very interesting to see how this fares in terms of liquidity. What are your thoughts on how this venture will fair?
aside: Citadel is looking more and more like a full fledged bank, especially with this latest product.
http://www.nuclearphynance.com/User%20Files/464/MS_FutureOfTheCDSMarket…
trading CDS (Originally Posted: 07/04/2009)
is there a way you can start trading CDS on a retail brokerage account?
I doubt it, its all OTC... so not likely in any size you are thinking.
"is there a way you can start trading CDS on a retail brokerage account?"
just trade the cash bonds
how not transparent the CDS market is before the crisis? (Originally Posted: 11/26/2011)
people said no one knows the writers of the CDS and who should pay for holder's loss?
but how could it be possible given that there are contractual agreements between 2 parties?
Not entirely sure what you're asking, but trades happen via a broker, so a trader taking the long side doesn't know who's taking the short side of the trade, and moreover, like with any standardized contract, either side can close out their position, meaning whoever holds the long/short side can change.
It's like when you buy a call/put; do you know who sold it to you? No, but because the system is standardized, it still works.
Please someone correct me if I'm wrong, but this is just completely wrong. You seem to be talking about an exchange traded product that is centrally processed/cleared.
CDS are OTC transactions where, by nature, you know your counterparty.
jsmort11: yes i agree with you. i know CDS are OTC transactions but this article said "Who wrote the protection and will have to pay?" and this is the reason why people said CDS market is not transparent.
http://firedoglake.com/2009/05/14/protecting-gm-from-credit-default-swa…
i was thinking: if we have OTC transactions, we are pretty sure who the counterparty is.
Four years ago AIG would've been on the other side.
Seriously though aren't financial institutions usually on the other side of CDS's... likely the very same bank that structured the deal? If the bank just helped to facilitate the deal is it obligated to report the identity of the counterparty is. Any experts here on hedging counterparty risk, aside with CDS's lol?
I've always been under the impression that the counter-parties on both sides of currency or interest rate swaps were non-financial companies such as P&G or Toyota, whereas one counterparty of CDS's was usually a bank willing to take risk. Either way, wouldn't it be on any counterparty's balance sheet considering FAS 133 (hedge accounting)?
jsmort11 is right. at the place I interned at (European BB in NYC), we bought the CDS from other banks. So we obviously did know who our counterparty was. we would usually send a quote request via bloomberg and then trade with the best offer or with the one that could offer the right amount of protection (we were hedging credit risk so obviously we had to take on bigger amounts of protection which not every counterparty could offer). no broker involved.
hope this helps.
another monkey: thanks for your inputs.
but this article is saying "Who wrote the protection and will have to pay?" and "this is the reason why people said CDS market is not transparent"
http://firedoglake.com/2009/05/14/protecting-gm-from-credit-default-swap...
what is this article referring to
The general public does not know who holds it. But if you bought CDS, you know your counterparty, and will often require your counterparty to post more collateral as the position moves against.
Dodd-Frank effect on CDS's (Originally Posted: 01/11/2012)
Hey Guys,
I was trying to understand this and was wondering if someone could send me some link on the potential effects of Dodd-Frank on the CDS market.
Thanks.
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