Clarus Financial Technology

Is this the scariest chart in 2015 for Swap markets?

Clarus data shows that the average tick size in USD Swaps is increasing. We show evidence that this widening tick size is a feature across all maturities. The data suggests that the amount of liquidity has stayed constant in the market, whilst the cost of liquidity is increasing.

This trend has been in place since the beginning of 2014 and may be accelerating now due to the widening CME-LCH Basis.

History, and lots of it

Within our SDRView products, we now have a thorough history that allows us to look at a considerable number of time-series. This allows us to identify trends in the data that have not been apparent before. We also back-date our data enrichment, yielding a much more transparent data-set to interrogate.

Bloomberg Tickers

One such example is our adoption of the Bloomberg Open Symbology. Quite simply, whenever a trade hits the SDR we now map that to the corresponding Bloomberg ticker. When looking at historical data, this therefore allows us to readily compare like swaps with like.

Tick Sizes

With this in mind, I decided to have a look at the average tick size in USD Swaps. The tick size I define as:

The price change in a given swap between two consecutive trades.

This can be considered as the maximum bid-offer spread that may be captured by a market-maker. Or the degree of aggression needed to trade if you are a price-taker. Equally, if swaps were truly a continuous market, then we would expect this to average out at somewhere between 0.5 and one times the typical bid/offer spread in an order book. Overall, I thought it was a surprisingly simple statistic that would give us a good flavour of how markets are evolving.

The Scariest Chart of 2015 so far?

Apologies for the click-bait title, I know it’s not our style. But when I started the analysis for this blog, I was truly amazed by the trend shown in the chart below.

To clarify what the data shows:

Originally, I was comparing a few sample weeks for 10 year swaps, and I saw an increase from 0.17bp in January 2014 up to 0.54bp in July 2015, with the intervening weeks seemingly confirming a gradual widening trend. So I then got worried about sampling bias, not having enough data etc etc. So I repeated for 2015, which confirmed the findings again, until we have this blog. I’ve now analysed every month and every swap maturity since January 2014!

The same chart for 10 year Swaps

As we know from our previous analyses, 5 year and 10 year swaps trade far more frequently than any other maturity. So these really are the bell-weather of the USD Swaps market. And we see the same trend in 10 years (shown above) and 5 years – always towards an increasing price gap between the previous trade and the next one.

The ISDA Report on Liquidity

I was reminded of the ISDA review of their Swapsinfo data for 2014, in which ISDA observed:

“Over the course of 2014, total swap data repository (SDR)-reported

average daily trade counts increased while notional volumes decreased,

suggesting more frequent trading in smaller sizes is taking place. This

inverse relationship was observed in both swap execution facility (SEF) and

over-the-counter (OTC) trading.”

Our enriched data allows us to take a more granular approach to trade counts and sizes. When we do this, it shows a slightly different trend. Swaps of matching Bloomberg tickers, traded as Outrights on-SEF, show a pretty stable average trade-size:


Although we do agree with ISDA’s finding that, generally speaking, trade numbers are increasing over time:

So what does all of this mean?

Liquidity, Liquidity, Liquidity

To my mind, this all relates back to liquidity in the markets and how easy it is to trade a market standard structure. A few conclusions from this data:

And, of course, this data raises some questions:

On the subject of the CME-LCH Basis, our data suggests that the average tick size started to increase before the CCP basis “blow-out” in April, but that this new pricing differential may have accelerated the trend. There is therefore scope for further analysis on this data.

Summary

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