Why is HFT not prevalent in the bond markets?

Discussion in 'Trading' started by Alex the Great, Jul 5, 2010.

  1. Surely a lot of bonds are listed on exchanges and traded electronically. Everything about a bond is quantifiable and perfect for inputting into trading models.

    Why is high frequency/algorithmic trading not prevalent in fixed income? Or is it?
     
  2. You're right. I saw a chart in an HFT book or article and very few people trade bonds in a HFT fashion as compared to FX, Equities and options.

    I think it may have something to do with the delivery of the bond...
     
  3. einai

    einai

    "Surely a lot of bonds are listed on exchanges and traded electronically. Everything about a bond is quantifiable and perfect for inputting into trading models."

    With the exception of so-called current US Treasuries (and their sovereign equivalents), almost all bonds are comparatively illiquid. Transactions are done in large blocks between trading desks and institutional clients. Spreads are a few basis points. Thus with the exception of current treasuries, automation is not really an option.

    The statement that ""Everything about a bond is quantifiable and perfect for inputting into trading models." is true, but exceedingly simplistic. Even the simplest callable bond has an embedded long option that is extremely difficult to meaningfully value despite the determinate characteristics of that option.

    In the case of CDO's, the embedded options exhibit rate-sensitive prepayment characteristics.

    In the case of all fixed income-related options, long and short interest rates, thus the structure of the yield curve, are involved on many levels, e.g. the discount rate for calculating the option, but also the rate driving the price of the underlying bond.

    Nothing that a few Crays can't handle, but still, the numbers that come out are pretty weak. You have I believe heard about some difficulties which arose concerning the pricing of CDO's?
     
  4. bone

    bone ET Sponsor

    The first trade Getco got into was electronic basis trading between Globex CBOT futures and the screen Cantor-Fitz and Brokertec treasury cash markets.

    HFT is prevalent in the electronic markets to the extent that the CME and Eurex allow messaging - all futures exchanges tightly regulate message-to-fills ratios. In the late 90's and early 2000's I used to track my messaging on TT and zip off one-lots to keep the ratio about 17:1 or so. Now, TT has 'slop' and 'throttling' features to help manage that better, but the best stratiegy is to not use your automation until the market has reached a particular level you are interested in.
     
  5. If and when interest rates go up, bonds should become more volatile and be more attractive to trade via HFT. :cool:
     
  6. Bonds are used in HFT as Hedging instruments.
     
  7. Bid/offer
     
  8. I am waiting for Bill Gross and El-Erian to officially declare the "new normal" has come to an end...therafter I expect some Brazilian Samba in Treasuries...
     
  9. RSJ seems to be a fun company for traders and mathematicians...:)
     
    #10     Jul 6, 2010