Introduction to Bond Lingo
Trading Floor Primer
rev. April, 2023
By
Julian Gammon III, Esq[1].
It is assumed that you are familiar with such basic concepts as the time value of money (present value and future value) and interest rates. Another fundamental law of the bond world is that price moves inversely to interest rates (yield). To help you understand some terminology in the fixed income markets…
· Arbitrage – One of the most abused concepts in the securities business. The true meaning is that of a risk-free transaction that exploits market inefficiencies. Usually it is applied to spread trades (long one security, short another one). Arbitrage could be the establishment of a trading position based upon some proprietary model. It could also refer to one’s outlook between a relationship between several different instruments or types of instruments.
· AI – Artificial Intelligence, also in the running for one of the most mis-understood/used terms in the securities business, is in vogue as some Investment Management firms have touted their portfolio/trading systems to clients as AI-based, with the strong inference that investment returns will be superior. Such claims should be met with extreme skepticism. A technically valid AI system would need to incorporate some of the following characteristics: Inductive Logic, Deductive Logic and Heuristics or “learning” algorithms, Recursion and possibly Optimization. The main problem with AI in trading and forecasting markets is that independent (input) variables change, and they change without warning, i.e. the model becomes mis-specified and is unstable. Firms making such claims can be exposing themselves to costly litigation if performance does not meet inflated expectations. Banking-regulated firms making such claims will attract regulatory scrutiny from the OCC and/or Fed examiners.
· AFS/HTM -These acronyms stand for “available for sale” and “held to maturity”, these are accounting rules fashioned by the accounting profession to permit their Bank/Dealer clients to avoid taking immediate mark-to-market “hits” in underwater US government (Treasuries mainly) and mortgage securities. These rules were originally fashioned to prevent a large US Bank (not named here) from insolvency (see TBTF) due to their large losses in their investment portfolio. The most distressing thing about AFS/HTM is that they have become embedded in FED Supervisory Policy and delays the day of economic reckoning. You generally won’t hear these terms on the trading floor, but they are critical for trading desk management and Bank Dealer management to understand. This is the institutionalization of the old accounting joke, “What is two plus two?”; accountant’s response: “What do you want it to be ?”
· Bill – A fixed income instrument issued at less than face value with an original maturity of one year or less. The US Treasury issues these, “T-Bills”.
· Basis Point – One hundredth of 1% of yield. (.01).
· Bid – Where a securities dealer will buy an instrument, i.e. “Where do you bid these bonds?”
· Benchmark – The most recently issued GOC (Canada) or (US) Bond or Bill in the auction cycle that is closest in maturity to the subject security.
· Bitcoin – The first, and most publicized, “digital currency”, touted as an alternative to “fiat currencies” managed (or mis-managed) by central banks. Payments can be sent on a peer-to-peer network without the need for intermediaries (e.g. SWIFT). The anonymity of the digital exchange paradigm can be seen as both an advantage and disadvantage, depending on one’s viewpoint. For cyber criminals such as practitioners of “ransomeware” and money launderers, digital currencies are the exchange medium of choice. The jury is still out as to whether or not digital currencies are a “bubble”- lacking intrinsic value and destined to fail. cf. Tulip Mania, 1634.
· Blockchain – The innovative peer-peer network technology supporting digital currencies, not to be confused with the digital currencies themselves. Proponents claim that blockchain records are tamper proof, therefore blockchains may be considered secure by design and exemplify a distributed computing system with high fault tolerance.
· Bloomberg – Refers to the Bloomberg Professional a ubiquitous computer terminal seen on trading floors which includes Fixed Income and Equity market intelligence (Commodities as well) and comprehensive analytical capabilities for evaluating securities, derivatives and trading strategies. Also refers to the privately held multi-billion-dollar company founded by Michael Bloomberg in the 1980’s when he was an employee of Salomon Brothers, a bond firm that has since been acquired by Citibank. The terminals are somewhat costly, in excess of $20,000/year for each one, but are viewed as an absolute necessity by market participants - both buy and sell-side. In addition to front office (Trading and Sales) these terminals are used by support functions such as Middle Office, Finance, Compliance and Risk Management.
· Bond – The sum of the present values of all the cash flows from a security. A Bond is a fixed income instrument with an original maturity of greater than 10 years. Generally, the longest “normal” original maturity is 30 years. Although Bonds of 40, 50 or more years have recently become more common. A Bond with no maturity, perpetual, used to be issued by the UK and were called “Consuls”. Economists liked these because they revealed the “pure” rate of interest.
· Buy-Side – This term loosely refers to the financial services sector of end buyers of securities such as Mutual Funds, Pension Funds, Sovereign Funds and Hedge funds. This can also refer to regional banks who buy securities for their investment portfolios. Sell-side players often look down at this group and are widely believed to consider this group as “prey” because they don’t see all the trading (order) flows or possess sophisticated trading models. There are some firms on the “buy-side” that are just as financially astute as the leading “bulge bracket” dealers (e.g. PIMCO).
· Capital Markets - This is the marketplace that serves the financial “intermediation” function between persons/institutions with excess capital to invest and the end users, the borrowers. The Capital Markets are compensated by the difference, or spread, between what the investor receives, and the borrower pays. This will vary between which vehicle (security) is used to cross capital from the investor to the borrower.
· Convexity – The second derivative of price with respect to yield. It is the curvature of the price/yield relationship.
· Callable Bond – A feature of a fixed income security that allows the issuer to pay back the principal at a point in time (Call Date) before maturity. The incentive to invoke this feature depends upon the level of interest rates at the call date relative to the level of interest rate when the security was issued. If prevailing interest rates are lower at the call date than the issue date the issuer has an incentive the redeem the security at the call date.
· Convertible Bond – Issuers like these because it allows them to borrow money at less cost than a normal bond because it gives the buyer upside potential on the issuer’s equity by allowing the buyer to “convert” the bonds into equity at a specified price. Dealers like these because they can strip out the embedded optionality with the aid of sophisticated computer models and run a “long gamma” trading book. The reason they are so popular with dealers is because of the information disadvantage between dealers and investors as the option component tends to be mispriced. Unlike PIK Bond and Stepped Coupon Bond issuers these are also issued by investment grade companies.
· Credit Derivatives – A relatively new development in the fixed income world (if that is where these belong). To date there has not been a major blowup on the scale of the Nick Leeson/Barings fiasco. However, there are several facets to this genre that are not well understood. For instance, modeling of Credit Risk requires a two-factor model consisting of the underlying reference entity as well as the counterparty seller (writer) of credit protection. This product also provides fertile ground for litigation as the five (three in Europe) enumerated types of “credit events” are not all well-defined. ISDA continues to wrestle with these issues. (Note: This paragraph was written well before the financial crisis of 2007-09 where the observation was “there has not been a major blowup….”. Famous last words which should serve as a warning to market participants who rush blindly into “new products”)
· CECL – This innocuous acronym, pronounced “Cecil”, stands for “Current Expected Credit Losses”, a new credit loss accounting standard that projects credit losses based on statistical probabilities. As such, CECL is viewed as a revolutionary change in the way the Accountancy Profession approaches credit loss when assembling financial statements. Accountants (pejorative term heard on the trading floor: “bean counters”) have traditionally been lagging in applying “advanced” concepts such as statistical probabilities to forecasts.
· Coupon – A periodic interest payment paid to the owner of a fixed income security.
· CMBS – Similar concept to MBS but are pooled commercial mortgages. These are originated by the dealer community. GSEs are not involved. A developing market and not a very liquid one.
· CUSIP – You most likely won’t hear this term in casual conversation on the trading floor, it stands for “Committee on Uniform Security Identification Procedures”[2] and is a code for uniquely identifying securities-which includes fixed income securities such as bonds. If you are involved in settling and clearing trades, then this becomes important to know about especially in making sure that a trader’s trades are not “DK’ed”. Note that only “securities”[3] have CUSIPS. Structured Products and Derivatives are “instruments” (a broader term) and usually don’t have a CUSIP identifier. International securities also have codes; “ISIN” or “Sedel”. Domestically issued securities traded in global markets will have all these codes.
· DK (Don’t Know) – Applies to a trade where the buyer and seller cannot agree to the terms on a trade ticket. This usually applies to one side making a mistake, or there has been a misunderstanding on the details of the trade (e.g. settlement date, amount, price, bought or sold or even the underlying security). The trade is either agreed and corrected by the parties or it is null and never occurred (void ab initio). This situation is potentially dangerous and can lead to losses where a risk position is not known or affirmed in volatile markets. Also used as a verb, “DK the trade” i.e. “Kill the trade”.
· Duration – The present value half-life of the cash flows emanating from a fixed income security. It is not the same as maturity. Mathematically it is a function of the level of interest rates, the coupon and remaining time to maturity of the instrument. There are two types which are closely related, Modified & Macauley (a Canadian Economist who came up with the concept in 1938 in a famous article)[4].
· DV01 – Pronounced “deevee oh one.” The dollar value of a one basis point change in yield to maturity of a fixed income instrument. It is mathematically related to duration. It is duration that is priced weighted. DV01 is also the first derivative of price with respect to yield. DV01 is a common measure of market risk for fixed income securities.
· DVP - This abbreviation is for “delivery versus payment” and is actually a very important concept in the buying and selling of securities as well as instruments. It means that payment is received at exactly the same time the securities are delivered or presented to a custodian such as a bank. DVP is done through a “clearing house” such as the National Securities Clearing Corporation (NSCC). Clearing Houses[5] match up buyers and sellers and ensure that payments match securities bought or sold. This standard method is preferred as it prevents, or minimizes the possibility of fraud where one party receives payment without presenting or exchanging the securities (or instruments). DVP minimizes “settlement risk”.
· GSE – Stands for “Government Sponsored Enterprise”. These are chartered by the US Congress. The most important ones were set up to facilitate home ownership by low to moderate income homebuyers. The first one related to home ownership was “Ginnie Mae”, Government National Mortgage Association, chartered by Congress in 1968. Securities issued by GNMA are guaranteed by the “full faith and credit” of the US Government. There are also non-housing related GSEs such as TVA, Tennessee Valley Authority, and the Import Export Bank (EXIM) which issue fixed income securities to finance their activities.
· IOs – This stands for “Interest Only” and represents just that. IOs are derived from mortgage securities or pooled mortgage product such as CMOs. These are viewed as highly risky because if you buy them and interest rates go down and the homeowners underlying the mortgages refinance, then these securities just vaporize. They are differentiated from Strips by the fact that the timing of cash flows from these are uncertain.
· Junk Bonds – “Invented” by Michael Milken. These are below investment grade bonds (< BBB). The polite way to refer to these is “High Yield”. Milken had the brilliant idea of bringing debt to market initially as below investment grade debt. Previously all non-investment grade debt had started out as investment grade but had been downgraded as the issuers fell upon hard times. A good example is the steel industry which initially issued investment grade bonds. These are referred to as “fallen angels”.
· Maturity – The date at which the principal amount of the bond is returned to the investor.
· Middle Office – A trade support group that sits between Trading (front office) and Operations (“Ops”) to ensure that all trades are settled and cleared seamlessly. These people aspire to become traders but even though they are smart enough not to be in Ops they are too stupid to be traders.
· MBS – Stands for “Mortgage Backed Securities”. These are collections, “pools”, of residential mortgage loans collected by Government Sponsored Enterprises (GSEs) such as Fannie Mae (FNMA), Freddie Mac (FHLMC) and the Federal Home Loan Agency (FHL) and sold to investors. The creditworthiness of FNMA and FHLMC are not explicitly backed by the Federal Government but as a practical matter the guarantee is implicit, as was proved during the 2007-09 financial crisis. The Government National Mortgage Association (GNMA) is another important GSE. GNMA securities are explicitly backed by the “full faith and credit” of the US Government and as such are viewed as having the same credit quality as US Treasuries. There is no requirement that GSEs need to originate MBS. MBS facilitate intermediation between homebuyers and the capital markets.
· MSRs - Mortgage Servicing Rights. The owner of these rights receives fee income for collecting the mortgage principle and interest as agent. It is kind of like an IO (but they are not an interest in a security) in that the rights will disappear if the mortgage is prepaid or otherwise extinguished. These rights can be separated from the underlying mortgage and traded independently of same. Wall Street “quants” have gone batty trying to model and/or value this MBS component, mainly because of the fact that MSR valuation is a non-linear function of mortgage interest rates (and other macro variables).
· Negative Convexity – A BAD thing (for investors). Usually associated with structured product such as pooled mortgages (CMOs) where undesirable elements of the structure are isolated into certain classes of the structure and then off-loaded to the investor. The investors who buy these classes are vaguely aware of this component when they buy the securities from the underwriter but are upset when yields go down (and prices rise on other fixed income securities) but the yield and prices go down on these instruments.
· Note – The same as a bond but with an original issue date of less than 10 years (US definition). There is no economic difference between a Note and a Bond.
· Offer (Ask) – Where a securities dealer will sell an instrument. “Where do you offer the ‘08’s?”
· POs – This stands for “Principal Only” and represents the principal component underlying mortgage backed securities. They are very sensitive to the general level of interest rates and as such are a useful vehicle for speculating. The timing of the cash flows is uncertain but at least you get your principal back.
· Par – Fixed income instruments are quoted in terms of percentage of principal amount. Par is 100% of the principal amount. The percentage sign is dropped i.e. 100, 90, 75, etc.
· PIK Bond – PIK means “Payment in Kind”, in other words instead of getting cash on a coupon payment date you get more bond paper (“wallpaper”) as a percent of par. These are issued by companies (rated below investment grade) that do not have the cash to pay to the investor. They are placed with investors by skilled bond salespersons. Investors should be extremely wary of these types of securities as they have a history of defaulting.
· Primary Dealer – A sell-side firm that is a designated by the Fed as a firm that has the right to bid in Treasury bond, bill and note auctions. Once viewed as an elite group, this designation has lost its luster as there is no longer any real advantage to belonging to this “Club”. On occasion, the FED may require these firms to bid in auctions in times of market turmoil. Historically, some State pension funds and other conservatively run buy-side firms were only permitted to trade with Primary Dealers. There are currently 24 Primary Dealers[6].
· Prop Trading – Proprietary trading or trading for the firm’s own account (as Principal) and not trading on an Agency basis for customers where the trading desk will take an order for a client either to fill immediately or “work the order”. Trading is based upon a trader’s (or trading management’s) “view” or some kind of proprietary arbitrage model. In practice, Prop Trading has been notoriously difficult to define, (and consequently to enforce restrictions) and brings to mind Justice Potter Stewart’s observation, “I know it when I see it, but I can’t define it”. Cf. Volcker Rule
· Quant - A person with technical programming and analytical skills, usually possessing an MS or PhD in Economics or a “hard” science. This person may sit on the trading floor and write arbitrage and/or risk programs for use by the trading desk. Affectionately known on the trading floor as “propeller heads” or “techno-geeks”.
· Quantitative Easing – Shorthand is “Q1”, “Q2”, “Q3”…,”Qn”. This references the purchase by the Fed of various categories of fixed income debt (private sector) ranging from higher grade corporate bonds to “junk”. This is really an attempt to legitimize/make respectable a fancy mechanism for printing money that has seen precedents in such fiscally irresponsible regimes as the German Weimar Republic in the 1920’s with historical origins reaching back to Medieval English Kings who practiced the debasement of their silver coinage.
· Repo – Short for Repurchase Agreement. A method that dealers use to finance their securities positions. Briefly, it is a collateralized loan. Other terms are: Reverse Repo, Open Repo, Term Repo and Flex Repo. Originally structured as a bi-lateral agreement, the FED has pushed “Tri-Party Repo” [7]with a Custodian in the middle between lender and borrower.
· Sell-Side – The sector of the financial services community that is in the business of buying and selling securities as a business. Firms that are sell-side may hold securities (or more broadly, financial instruments) as trading inventory. The implication of this is that the firm assumes and manages credit and market risk associated with holding inventory. Firms designated by the US Treasury as Primary Dealers in US Government securities are sell-side.
· Spreads – Refers to the difference in yield to maturity between one fixed income security and its related benchmark (recently issued Government of Canada or US Bond or Bill). In fixed income markets everything is viewed in terms of spreads, so the concept is central to understanding of fixed income markets. Spread can also refer to the difference in price between where a dealer will buy or sell an instrument.
· Stepped Coupon Bond – In the same genre as the PIK Bond. The security starts out for a period of time as a zero-coupon bond (say 5 years) and then “steps up” to a tantalizingly high coupon rate in order to lure investors. The issuers have the same credit profile as the ones that sell the PIK Bonds. The companies expect to develop earnings down the road in order to allow them to pay the coupon. The salesperson needs to sell the buyer on the company’s rosy prospects. Again, like PIK Bonds, investors should be leery of these.
· STP – Straight Through Processing (not the automotive gasoline additive) where front office trade capture systems link and feed through clearing and settlement systems (C&S) without manual (high-touch) intervention by operations personnel. A favored systems implementation objective.
· Strips – These are also called zero coupon bonds, and have only one cash flow associated with them. They trade at a discount from face value as an interest rate (or yield) is implied in the pricing. They are called strips because they were originally attached to a bond as one of the cash flows (either coupon or principal payment) before it was “stripped off” or detached from its underlying security. The market is Canada consists of strips in GOCs, Provincial Debt and Debt issued by municipalities. Unlike Humpty Dumpty they can also be put back together again, “reconstituted.”
· Structured Products – Investment Banks (Securities Dealers) have in recent years gravitated towards constructing financial products (“financial engineering”) for sale to their clients with multiple moving parts, usually incorporating some optionality and leverage, due to collapsing bid-offer spreads in traditional vanilla fixed income products such as Treasury and Corporate Bonds. The dealers like Structured Products because the “spreads”, i.e. profits, are larger when the constructed instrument is opaque to investors and consequently, they have wider pricing latitude. Potential investors in these schemes should attempt to reverse engineer these structures to identify individual component risks and costs and make a determination if pricing is consistent with the risk profile they are attempting to achieve.
· Taper/Tapering – This refers to the eventual scaling back of “open market operations” (reverse repo) by the Federal Reserve Bank (Fed). Briefly, the Fed, in order to prevent a “financial meltdown” coinciding with the commencement of Covid-19 in March, 2020, purchased fixed income securities at an order of magnitude beyond what they have historically purchased (US Treasury Bills, Notes & Bonds) and purchased billions of dollars in Investment Grade, Mortgage and High-Yield Bonds, thus ballooning the Fed’s balance sheet by several trillions of dollars. The ultimate impact was to increase the “money supply” i.e. “M2” by over 30% which is the primary driver of inflation. The timing and scale of tapering is widely expected to have a significant impact on fixed income and equity markets. If the consensus market perception is that tapering is not being managed effectively (e.g. “soft landing”) the impact could be severely negative across global markets.
· TBTF – This is the acronym for “Too Big to Fail”, the controversial policy that was institutionalized in the Dodd Frank Act of 2010 after the 2007-09 financial crisis. The concept is that some US Banks, and foreign as well, are too large to be allowed to fail because of the risk that insolvency could have a domino effort on the financial system. Globally, these Banks are referred to as “G-SIBs” -Globally, systemically important banks.
· Transitory – Refers to what some commentators, as well as some policy makers, e.g. Fed Chairman Jerome Powell, hoped would be a temporary impact of wildly expansionary monetary policy recklessly initiated as a Covid-19 response, above the 2% inflation index baseline, measured by the Consumer Price Index (CPI). This term has quickly fallen into disuse as the government’s recent inflation statistics are conceded to be anything but transitory. Cf. Milton Friedman, “Inflation is always and everywhere a monetary phenomenon.”
· Value of a 32nd – Related to the concept of DV01. Since the US Treasury issues are quoted in terms of whole dollar price and the fraction of prices is quoted in terms of 1/32 of 1. The concept is that a 1/32 change in price translates into a yield change. Loosely speaking, it is the partial derivative of yield with respect to a small change (1/32) in price. The quotation of bond prices in 32nds is an historical accident. The practice in Canada is to quote in decimal.
· VaR – Value at Risk. A Risk Governance construct used for measuring and monitoring Trading Desk and overall firm exposure to market risk. Favored by Regulators and some academics but essentially useless for traders and trading management in managing actual market risk. Theoretically-based on a variance-covariance matrix of all traded assets. VaR measures the probability that trading gains or losses would fall within a bracket x percentage of the time, based on statistical confidence levels.
· Volcker Rule – A rule prohibiting Federally insured US Banking institutions from engaging in trading as Principal (for their own account) named after former Chairman of the Federal Reserve, Paul Volcker. In theory, the Rule prohibits “Prop Trading” that is back-stopped by FDIC insurance. The statutory basis for the Rule is found in § 619 of the Dodd Frank Act passed by Congress in 2010[8]. The objective has proven to be very difficult to define from a regulatory standpoint as five different Federal Agencies issued a joint Rule 892 pages long.[9] Cf. Prop Trading
· VPP – This weird acronym stands for “Volumetric Production Payment”, a collateralized energy loan (an overriding royalty interest- ORRI), usually extended by Banks[10] or other lender/investors such as hedge funds that is collateralized by hydrocarbons (oil or natural gas) in the ground. The lender may attempt to hedge the market risk of this exposure by entering into a short position in energy futures contracts. This structured loan product is deceiving because it is incredibly risky. For one, the hedge position is unlikely to effectively track the energy loan assets in the ground due to the fact that, in the case of crude oil in the ground, it is almost always comprised of lower grade/high sulfur content which is expensive to refine. (which are only an estimate made by geologists). More problematic is when the lender attempts to “perfect” (obtain legal title) the energy assets in the event of default- under a Federal statute the lender becomes unlimitedly liable[11] for any environmental cleanup costs. Unwary investors should be on alert if this structured product is “pitched” to them as a simple collateralized loan investment.
· Yield – Yield to Maturity is the internal rate of return of a fixed income security. It assumes that all cash flows from the security are reinvested at the IRR (This is actually a big drawback in the concept of yield-to-maturity, but the concept is too ingrained in the market). The IRR is that discount rate which sets the present value of the sum of all cash flows from the instrument to zero.
· Trader – A person authorized by the securities dealer to commit capital on its behalf. A salesperson lacks such authority.
· Auditor- (Trader’s Perspective) A knave. Like Santa Claus, this doofus comes around once a year to ask stupid questions and then goes away. Required by regulators and gives management a false sense of security.
· Trader – (Auditor’s Perspective) Someone who makes more than an auditor.
· Investment Banker – (Trader’s & Auditor’s Perspective) The person seen on the trading floor wearing red suspenders (or “braces” if you prefer).
Some commonly heard phrases on the trading floor…
“Done Away” – Pronounced like “dunnaway.”, as in Faye, this means that trader was not able to buy or sell a client’s securities because the trade was executed for the client at a better price somewhere else. In a famous incident at one of the Investment Banks a new Fixed Income Sales Manager with no previous Bond Market experience, was heard to ask, “Who is this account doneaway? They seem to do a lot of trades.”
“You’re Done” – Means that an order has been filled.
“Where do you make them?” or “Where are you on these?” – An inquiry to determine the current price level of a security where the questioner wants to know both the bid and offer price. A typical response would be “ten – twelve.” This is the fraction of the price as both sides are presumed to know the whole price or “handle.” If someone must ask for the handle, they are displaying their ignorance of the market and it is considered bad form.
“Full on the name” – Usually a client but can be a dealer. This is where an account can buy no more securities of the issuer because of internal credit exposure limits or diversification requirements. If it is a dealer it means that the trader is at their limit set by Credit Risk for the issuer.
“Doesn’t fit my position” – This means that a trader will not give the best bid or offer price because they don’t want to change the risk profile of their portfolio.
“Paint a Picture” – This is where a trader will put up a two-sided market (bid/offer) on an inter-dealer broker screen where the purpose of directly executing a trade is secondary. The purpose is to create activity, or a perception of activity or pricing in a particular issue. The market “painted” by the trader may be purposefully deceptive (i.e. “off-market”). The Dodd - Frank Wall Street Reform Act passed in 2010 made such activity, called “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution). illegal. The argument against outlawing such market gambits is that market participants are sophisticated, knowledgeable professionals and that such activity is part of price discovery in the markets.
“It’s on special” – The word “special” pertains to the repurchase (Repo) financing rate for a specific security. Dealers in Bonds finance most of their trading inventory in the Repo market. Where a particular security is “on special” it means that the security is harder to borrow ( to make delivery against a short position) and the dealer gets a lower interest rate for lending against a security “on special” than would otherwise be available in the “GC Market”; GC – General Collateral.
“I don’t like the levels” – Indicating that the quoted price of a security is not where a client thinks it should be. This type of statement is usually made after an analysis of the yield spread to its benchmark security.
“It is rich (or cheap)” – This expresses the concept of relative value that is central to fixed income markets. Usually it is based upon some historical relationship of where a security has traded in relation to its benchmark or other securities with comparable characteristics. This statement could also be based on some analytical model.
“Work an Order” – a commitment by a Trader to use “best efforts” to execute a client’s orders at the levels given by the client if the trader can execute the order in the market without assuming the market risk to fill the order. The trader agrees to act on an Agency basis and will not fill the order from the trader’s risk position. The trader will not sell short to the client to fill the order to buy nor add to their position if the client wants to sell.
“You could drive a truck through that spread” – Expresses the view that the difference between the bid and offer price is so large that the client feels that they are being ripped off. Can also indicate that the market for the subject security is illiquid.
“[He/She] wouldn’t know a Bond if it came up and bit [Him/Her] in the ass” – An expression of disdain by a market participant about a Client/Colleague/Competitor who appears clueless about some important aspect of the fixed income markets.
“It trades by appointment” – Expresses the view that the market in the security is highly illiquid.
“dead cat bounce” – A cynical phrase sometimes used after a market (can be a specific stock) experiences steep losses and rebounds somewhat in the next trading session where the rebound is viewed as anemic. Derived from the idea that "even a dead cat will bounce if it falls from a great height".
“It trades 50 back” – Substitute any number for 50. This is another way to express yield spreads. This is the same as saying the issue trades at a yield spread of 50 basis points above its benchmark or another instrument.
“These are indicative levels” – Meaning that the trader is not firm in his bid or offer and may not actually be willing to execute at these prices. The trader is trying to be helpful in providing information to the client, but it is uncertain of where the security should actually trade.
“For Size” – Meaning a large block of bonds is available either for sale or purchase much greater than normally traded. Alerts the parties to the fact that the trade may “move the market” i.e. change the relationship of spreads. It could also mean that one of the parties expects better execution levels due to the size.
“Hit the bid” – Someone has just sold securities to a party who has posted a bid on a broker’s screen.
“Lift the Offer” – Someone has just bought securities from a party who has posted securities for sale on a broker’s screen.
“Locked Market” / “Inverted Market” – These terms describe anomalies that occasionally appear on the broker screens in fixed income markets. In a “locked market” the bid price is equal to the offer price. Usually this means the market is very liquid and there is no spread for dealers to profit from. An “inverted market” is a much rarer occurrence and means that the bid price is greater than the offer price. The quantities on the bid and offer side explain the anomaly and means that there is a rush by many players to buy or sell on one side of the market. This is usually a temporary, short-lived phenomenon.
“Woulda, Coulda, Shoulda” – A lament sometimes heard when a trader has missed a major market move, a credit move or even a spike in a particular security. Experienced Traders will tell you that it is best not to focus on what could have been.
“DK the trade” – This means that the buy and sale particulars of a trade don’t agree (price, subject security, settlement date etc.) hence either side Doesn’t Know (DK) the trade. The discrepancies may be resolved to both party’s satisfaction or there is an agreement that the trade never took place.
“Unwind the position” – A trading position consisting of more than one position that was established (usually represented as an arbitrage) is being liquidated resulting in a “flat” or neutral (no risk) position.
“Legging it, un-legging” – This describes the practice of establishing, or unwinding, a risk position by only doing one side at a time, leaving open, for a short period of time, exposure to directional (market) risk. This is a tempting practice where a trader closes out (or establishes) only one side of a position in the hopes of timing the direction of the market for the other side. Incredibly risky, and almost always a loser.
“Could you freshen that up” – This means that a period of time has passed, or a newsworthy event has intervened that could affect the market since the trader last quoted the market in the security. The salesperson is asking for a new price quote for the security.
“Those bonds come out at…” – The trader is indicating that while the securities are not currently offered, if a bid is posted with a broker a holder(s) will be willing to sell them from their portfolio.
“Flight to Quality” – This is an expression meaning that investors (including dealers) are selling securities (this can include equities) and are purchasing US government securities (Bonds, Notes and particularly T-Bills). US Treasuries are viewed as the safest securities in the world and are considered risk free from a credit standpoint. T-Bills are the safest instrument from a market risk standpoint as well. This may be due to some catastrophic economic event (such as the Asian meltdown) or even war (as in the Iraq invasion to Kuwait). This is a phrase closely related to the concept of fear.
If you serve in a control function such as Product Control, Risk Management or Audit and question the trader’s marks you will hear one (or more) of the following responses from the trader:
“It doesn’t trade like that”
“You don’t understand this market” or if trader is condescending, “You don’t understand our markets”
“The market is very volatile”
“The market is very illiquid”
“The bid / offer spread is very wide” (Note: The B/O spread is wide only when Auditor is around)
“It was a fire sale”, or “The account had to get out, so I low bid him”
“They are really worth more (or less depending if trader is long or short) than where I bought (sold) them”
“It was an odd lot”
“We’re marking them conservatively”
“The outside price is bad” (If it doesn’t support trader’s mark)
“But it matches the outside pricing” (If outside pricing supports trader’s position)
“You couldn’t move the entire position at that price”
“The account was not in touch with what they were actually worth”
“It is a special situation” (The all-purpose explanation for a risky/illiquid/money-losing trade)
“We don’t want the P&L volatility” (If you hear this, the trader has slipped up and told the truth)
[1] BA, MA Economics, George Washington University; J.D., LL.M. New York Law School, CIPP/US, CIPP/C, CIPP/E
[2] About CGS Identifiers- CUSIP Global Services
[3] Registered under the Securities and Exchange Act of 1933, 15 U.S.C. § 77a et seq.
[4] Macaulay, Frederick. (1938), The Movements of Interest Rates. Bond Yields and Stock Prices in the United States since 1856, New York: National Bureau of Economic Research.
[5] https://www.cfainstitute.org/en/advocacy/issues/central-clearing-houses#sort=%40pubbrowsedate%20descending
[6] https://www.newyorkfed.org/markets/primarydealers
[7] Tri-Party Repo Infrastructure Reform - Federal Reserve Bank of New York - FEDERAL RESERVE BANK of NEW YORK
[8] Pub.L. 111-203, 12 U.S.C. §5301et. Seq.
[9] 12 C.F. R. Part 248, 79 FR 5779,5804 (Jan. 31, 2014)
[10] In 2016, the OCC was so concerned with these structures and the risk that they entailed to the “safety and soundness” of the banking industry that they issued specific guidance on Oil & Gas (O&G) to their bank examiners, https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/oil-gas-exploration-prod-lending/pub-ch-oil-and-gas.pdf
[11] See 42 U.S.C. CHAPTER 103-COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITYSUBCHAPTER I-HAZARDOUS SUBSTANCES RELEASES, LIABILITY, COMPENSATION, 42 U.S.C. § 9607. Liability