Friday, July 19, 2013

Why Do Treasury Traders Complain About Low Trading Volume??

On the one hand, for just about everybody trading in the UST market, there is always enough liquidity to put on or take off a position, in full, at any given moment.  How many traders trade more than 1000-2000 10yr contracts?  You can always buy or sell 1000 10yr contracts without moving the market.   While this is a problem for the primary dealers (who often bid / offer 1bln 10yr notes for their customers...the equiv of 10,000 10yr contracts), this is not a problem for the average day trader.

However, the price action patterns that occur when 50mm/bp (60 bln 10yr note equivs) trade in a 15minute time bar...vs when 5mm/bp trades in a 15minute bar...well, they are just different.  I know that statement is a little vague, but its difficult to put into words what we traders have learned via pattern recognition.   Everybody sees this activity in the screens, and the existence of this activity means more traders (large traders) are participating in the market.   Even though the UST market is the "deepest and most liquid bond market in the world"....there are still quantities that scare even the primary dealers.  The benefit of having large volume trade in the screens is the mechanism of price discovery, and volatility.  Scaring the dealers (the liquidity providers) enables things like short covering rallies...long liquidations, supply distributions, and the like.  The more volatility...the more price discovery...the easier for day traders to read what the larger market participants are doing...and thus...the easier to follow along.

To a certain extent, this is just a gripe....but today, for example, 10yr futures were stuck in a 4 tick range for 7 hours (10am --> 5pm)!!!  This is just not normal.   Also, the price discovery process (price action) normally has a volume measured moves based on a certain quantity of volume.  With the lack of significant volume trading in the market...price doesn't move enough...doesn't create enough volatility to get an accurate "read" on the direction of interest rates.  Volume tends to create volatility...which tends to bring in additional market participants.  Its that age old saying...volume begets volume.

This week, daily trading volumes were 50-60% of average for the past 2 months, and intraday volatility was reduced by a similar margin.  I'm hoping that the hot July in NYC is not a coincidence.  I'm hoping that many large traders are simply on vacation and will return at the end of the summer.  If not...then my trading strategy will need to change.

Of course, my complaining won't change anything.  Until trading volumes return, the best volatility will occur during London trading hours into the NY morning...and the NY afternoon will be the dead zone.

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