“[We have] reviewed [our] pandemic planning procedures and are prepared to respond appropriately if and when the situation progresses”, the Cboe said Friday, adding that, if necessary, it will close the Chicago pits and operate the options exchange in “electronic only trading mode”.
“Cboe is prepared to facilitate the normal operation of all trading platforms by staff working from remote locations, including from home, if warranted”, a statement reads.
It was the latest sign that financial services provision – an increasingly electronic business anyway – could be affected by containment measures tied to the coronavirus outbreak.
This week, JPMorgan, Morgan Stanley, Bank of America and Danske all made moves to divide workers and split operations, utilizing back-up locations in order to reduce the risk that entire lines of business will be jeopardized by one infected employee.
“Dividing our workforce into different locations improves our ability to serve clients continuously while reducing the health risks associated with physical contact should a case arise”, JPMorgan said, in a memo to workers Thursday.
Morgan Stanley moved half of its traders from Manhattan to Westchester, while Bank of America will shuffle at least 100 employees in equities and FICC to a site in Connecticut next week as a precaution.
One question worth asking as carbon-based lifeforms play hide and seek with the invisible biological threat that’s chasing humanity around the globe, is whether and to what extent this will increase the chances of already illiquid markets becoming even less reliable at a time when cracks are beginning to show.
“We would highlight the risk of ‘people'”, Deutsche Bank’s George Saravelos wrote, in a note dated Friday. After citing the same contingency plans mentioned above and observing that “work from home arrangements are being encouraged”, Saravelos asks if “market functioning and liquidity operate as smoothly when the world’s major financial centers are in partial shut down?”
The answer, of course, is probably not. “Worry about liquidity, not funding”, he goes on to say.
Of course, funding pressures are building, as highlighted in a predawn note published in these pages (see: “Defcon 1“). But Saravelos reminds you that “the black swan is a liquidity crisis”.
As regular readers are acutely aware, one of the topics near and dear to my heart is the inherent liquidity mismatch built into many popular credit ETFs, which promise intraday liquidity against an underlying pool of assets which is more or less liquid depending on market conditions.
Right now, market conditions are challenged.
“At times of stress the question always arises as to where is the vulnerability in the financial system [and] in our view, it is not a funding crisis like 2008 but a liquidity crisis we should be worried about”, Deutsche’s Saravelos went on to write, adding that “banks’ capacity to hold inventory has been severely curtailed by regulators”.
He’s referring to the onerous post-crisis regulatory regime which makes the street less willing to lend its balance sheet in a pinch. That regime along with the explosion of corporate issuance has created a dramatic mismatch between the market itself and dealer inventories. Have a look:
“Investor assets have been funneled into a very narrow set of ETF vehicles”, Saravelos cautions.
Although credit ETFs have survived stress test after stress test, worries persist, as do skeptics, who have for years cautioned that some left-tail event will eventually come calling and expose the underlying liquidity mismatch.
Friday marked one of the worst days for credit markets in years, as corporate bonds tied to travel names and energy companies came under pressure amid warnings from airlines and the worst single-day collapse in crude prices since 2008.
Market participants are clearly trying to find liquidity where it’s available, which in credit means turning to CDX and ETFs. The spread on CDX.IG blew out by the most since 2011 on Friday.
According to Lipper data out Thursday evening, investors yanked $4.7 billion from IG funds in the week through Wednesday.
That’s the most since May of last year.
As one PM told Bloomberg, “this is what the start of a recession after a long bull market feels like”.
“This is the first day of seeing some panic in the market”, he added.