VOLUMES DRY UP AS PLAYERS WIND DOWN AHEAD OF Y2K.
?Elisabeth Bertalanffy
iinews.com
Over-the-counter derivative desks across all asset classes already are being hit by a dramatic pull-back in trading volumes ahead of Y2K. ?It?s like a Christmas market already, and it?s only October,? said Ian Groome, a forex options marketing official at ABN Amro Bank in London. Activity has at least halved as banks are starting to close down books, and many will stop quoting prices between mid-December and mid-January. Several major banks in London are expected to close down books as early as mid-November, according to market officials. The ensuing dry-up in liquidity is causing volatilities to skyrocket.
In the fixed-income market, swaps trading volumes already have shrunk to 30-40%, and options are almost non-existent, according to one fixed income trader in Frankfurt. Banks are closing out positions with January and December expiry dates, reducing risks and not taking on any new exposures. ?Even the major players, like J.P. Morgan, are no longer aggressively trading in the market,? one Frankfurt official said. Increasing illiquidity and volatility already is making it difficult for players to close out large positions, he added. ?The pain gets distributed to fewer and fewer players the more volatile it gets.? Besides Y2K fears, the liquidity dry-up is also driven by the absence of leverage players, such as hedge funds, following last year?s financial crises, the trader noted. Calls to J.P. Morgan were not returned.
Though the impact in the forex markets hasn?t
been as severe, officials said they are seeing
50% less trading than last year, and 25% less
compared with previous months. Overall
volumes have been lower this year because of
the euro?s implementation, explained Groome,
who declined to comment on ABN?s plans.
Liquidity is low as most players already are
hedged, which is why orders that do go
through the market have an exaggerated
impact, according to a New York forex official.
It will dry up further, leading to widening
bid-offer spreads and a number of erratic
market moves as the millennium approaches,
Groome predicted.
The slowdown has hit the equity markets as
well. ?Back offices have asked clients to keep
activity to a minimum,? said Vanessa
Gilbert-Gray, head of equity derivatives sales
at Dresdner Kleinwort Benson in London. She
added European OTC equity derivatives trading
now is between one third and one half its usual
volume. However, there is still demand for Y2K
hedges from large corporates, which are
buying short-dated equity index puts to get
them through the turn of the year. Gilbert-Gray
said DKB will continue quoting. |
