Ghost in the Machine

The repricing of credit, as it’s being called, continues to send
reverberations throughout global markets. Spooky quant activity seemed to
have leveled off though, but man what was that?

L.A.-based trader Mike Martin offered his take: “Prime’s couldn’t price the
instruments used as collateral adequately. In order to raise the cash, funds
offset positions in the most liquid markets — trades that they otherwise
would have not have been offsetting because they had to reduce margin
balances — thereby raising cash. Programmers of these computer-quant models
did not consider this outlier event.”

The deleveraging may not be over. If client redemptions letters show up in
greater quantity than buy/sell orders, Martin explains, there may be yet
another bout of extreme volatility. “Funds will need to liquidate securities
to meet the redemptions,” he says.

Originally published in the October 2007 issue of Trader Monthly.

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