S&P Futures, MS CDS, And MS Bonds

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors

What do MS CDS and S&P Futures have in common?  Everything AND Nothing.

MS CDS and ES (E-mini S&P Futures) are clearly correlated.  As MS CDS tightens, S&P futures rally, and vice versa.  That is pretty clear.  They are also the two most talked about things all day long lately.  That is where the differences become blatantly obvious.

ES trades from 6 pm on Sunday until 4:15 Friday virtually continuously.  It is global and the price is constantly known, and you can see the depth of the market at any given time.  ES has been trading about 3.1 million contracts a day.  Each contract represents an exposure of $56,112.50.  That is a notional volume of about $175 billion.  Yesterday, ES hit a low of 1068 and a high of 1119, about a 4.5% range.  With volumes of $175 billion and huge swings, there must have been massive demand for counterparty protection?  As far as I know, CDS on CME does not trade.  I’m not sure anyone has ever asked for CME CDS and it isn’t in the DTCC list of top 1000 Reference Entities.

Now look at MS CDS?  No one even knows how much traded yesterday.  No one knows what the volumes were on the way up or on the way down.  I am guessing that about 50-100 trades occurred in the entire market yesterday.  It is just a guess from a couple of volume numbers I did get.  Given the volatility, a bunch of the trades were probably for $5 million instead of the standard $10 million.  At the low end of the range, 50 trades at $5 million, volumes would have been $250 million.  At the other end it could have been as high as $1 billion.  Realistically the number was probably right around $500 million.  Yesterday, in one of the busiest days ever, MS stock had volumes of 76 million shares.  Assuming the average trade price was 12.50 that is a volume of $950 million.  So for all the talk about how “illiquid” or “thinly traded” the CDS market is, the volumes are meaningful compared to stock volumes.  It would be nice to know the exact numbers, and it would probably be helpful, but that is something the regulators have decided isn’t necessary for functioning markets.  Until the regulators get their act together, we will have to just work on best guesses, and yesterday the volumes were probably about 3:1 stocks vs CDS, which I don’t think that is a particularly abnormal ratio.

For all the complaints about how “such a low volume market” like CDS can push the stocks, it is worth comparing to the bonds.  It looks like MS has about $187 billion of debt outstanding.  According to “TRACE” data, there were 201 trades totaling $687 million.  Not bad until you examine how TRACE reporting works.  The most active bond was the MS 5.5% of 2021, the benchmark 10 year.  If a dealer buys from a client, sells to another dealer in the street through an intra-dealer broker, who finds a client to sell to, that counts as 4 trades.  So one real trade, where the bond goes from one client to another generates 4 trades, each with a little bit of P&L if all is working correctly for the banks.  Since every buy and sell is accounted no matter what, and the interdealer trades add even more, the right volume number is somewhere between 50% and 25% of the stated volume.  That gets real volumes to around $300 million as a good estimate.  At the lower end of the range of estimated CDS volumes.  But at least with the bonds, you could download all the data and filter out the “D” trades, which are dealer to dealer, and adjust for double counting of “B” and “S” trades.  Again, why isn’t that available for CDS?

TRACE even lets you see what price bonds traded at.  If anything, it only confirms that bonds were moving similarly to CDS and that they have similar volumes.  Why have regulators been so insistent on making some transparency in the bond markets available but have done nothing to push CDS into the public domain in spite of the obvious impact on individual stocks and bonds, and even broader markets?  I don’t know.  It cannot be that they believe that CDS shouldn’t be available, and it shouldn’t be because it is too complicated – it isn’t much more complicated than stock or treasury futures, all of which are extremely liquid and transparent.

The other big talking point is that CDS is being driven by investors hedging “counterparty” risk.   That I am willing to believe plays a role in this whole move.  I have written repeatedly that the financials and counterparty risk are extremely correlated and can create negative feedback loops.  As CDS widens, clients who have bought protection are in the money.  If the spread widening that they are profiting from is name specific and non systematic, then they don’t really care much about the counterparty risk since the bank they are facing is fine.  They do care when they are profiting from a move wider in financial spreads, and the counterparty that owes them more money by the day is seeing its spread widen as well.  That creates the need to hedge the counterparty risk.  Either that, or accept collateral from the bank.  The collateral idea doesn’t work because most hedge funds aren’t set up to manage collateral, and banks are extremely reluctant to provide collateral to a hedge fund.

So we are left with the status quo, that as bank spreads widen, systematic risk fears increase.  Investors start talking about the possibility of a daisy chain of defaults.  Clients rush to hedge counterparty risk.  Traders short banks in expectation that someone will come in to hedge counterparty risk.  The banks have fought clearing and exchanges, so it really does serve them right.  So greedy to keep the market opaque and keep boutiques away from this revenue stream that they have once again set up the potential for bear runs.  After Bear Stearns this should have been fixed, but wasn’t.  After Lehman it should have been fixed, but wasn’t.  If we make it through this crisis, it likely won’t be fixed.  For the safety of the system, and to reduce systematic risk, and to eliminate inane talk of daisy chain counterparty defaults, these trades need to be cleared.  It works for stock futures which are more volatile, it should work for CDS.  The ironic thing is that the best dealers would figure out how to make money in the new system.  It wouldn’t exactly be the same way they make money today, but they would adapt and be successful.

I have to admit that I am sick of listening to talk about MS CDS when so much of the conversation addresses issues like volumes, liquidity, transparency, depth, counterparty risk, etc., when all of those issues could be, and should have been, addressed by regulators.  The focus should be on whether or not there is value in MS credit at these prices/spreads not whether the prices/spreads are merely an illusion.  I suspect that if we had all the same transparency that exists for stocks, MS CDS and bond spreads would be exactly the same as they are now, but at least we could be focused on the real problems and issues at MS.

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Sequitur's picture

Cramer and CNBC talking about Zerohedge and the NYT article.

gmrpeabody's picture

Gee Tyler, you made the big time on CNBC.

covert's picture

there's too much debt in the market already.



johngaltfla's picture

Oh crap, Cramer just called Tyler an "anonymous blogger"....

I've got to get some popcorn and beer for this repsonse....

redrob25's picture

Tyler is anonymous. That's not incorrect. I love the fact zerohedge is getting serious mention on CNBC, especially with Bank Apologist #1 Cramer. 

Keep it up, ZH!

Landotfree's picture

Multiple people post under the same userid or Tyler, also they were correct on CNBC some of the bloggers have been kicked out of Wall St.   See the people on ZH are not really any different than the people they are talking about, it's just they feel bad they were kicked out of the party.   

And people's accounts have been locked when they have identified the names of the people posting. 


jdelano's picture

you're lucky they don't give out your name, mega troll

Landotfree's picture

Yeah I'm scared.   That is why when people exposed their name they started deleting and suspending accounts.   And said some stupid crap like, "the first rule of fight club is don't talk about fight club".  Funny I watched that movie and I don't recall them starting a website and promoting fight club.   

What they said about ZH on CNBC was correct, at least as far as what they said about ZH.   Whether MS is a fraud I will not comment on as I believe the whole system is a fraud.   Of course, you can go back to calling me names.  

As far as I know nobody on ZH has come out, the exact opposite has happened, people have exposed them.   Whether or not that revelant is up for debate but it is true.

jdelano's picture

you get that no one here cares where the tylers came from, right?  the crazyiest people make the best shrinks--it gives them insight.  Whoever the tylers were in their past lives makes no difference.  They are ZH now, and ZH is a far better resource than any MSM outlet for understanding what is really happening in the market.  the question is what are you doing here and where does your acrimony stem from?  It makes no sense for you to be here commenting unless you feel threatened by ZH or are just paid to come here and try to undermine the blog's credibility.  Either way, it's a complete waste of your time.  Post away guy, your smear campaign is like trying to piss into a firehose.   

Landotfree's picture

Oh my, conspiracy theory.   I would say it's a waste of your time telling me what to do.  I am sorry I am not going to do what you want me to do.  

I would say they feel threatened since they are the ones that suspend accounts.   And yes, they are criminals that were kicked out of the criminal party.    I love you telling me informing you the Truth a smear campaign since that is what ZH has been accused of.  Quite funny.   Sorry I don't get paid by anyone, try again Tyler or whoever you are.

Daniel Ivandjiiski was caught insider trading and I would imagine the rest of the contributors are in a similar position.   They are mad because they were kicked out of the party, probably none of them have had a real job in their life.   The don't really care for the Truth unless they can use the information to take money from someone else.   They are no better than the people they are talking about.

I find it funny people that claim they want the Truth actually are the ones that run from it.

fuu's picture

Hi Redneck Repugnicant/Mako/Libertarians for Prosperity! Always nice to see your bullshit in the morning.

jdelano's picture

"They are no better than the people they are talking about"

the people they are talking about don't freely disseminate what they know to the masses.  Aka--us.  

"I find it funny people that claim they want the Truth actually are the ones that run from it."

No trouble believing that the Tyler's are dropout streeters pursuing a vendetta and using this blog to manipulate the manipulators and generate profits.  Don't care.  The charts are real, the interpretations are often spot on, and the conclusions they arrive at are a viewpoint you'll never get from CNBC.  I hope your book is suffering badly from the existence of Zerohedge.  Cheers! 

Landotfree's picture

But you do care or you wouldn't be out here posting about it.   

My existence has no bearing whether ZH exists or not, I have no book.  

I never claimed or did not claim anything about the rest of your post.  Cya.

Jack Napier's picture

"A man is defined by his actions, not his memories." ~ Kuato

As long as we are willing to bicker about trivialities our oppressors will delight in our inability to unite against them. Grow up people.

riley martini's picture

 The fact that David was prosecuted proves that he is not an inside fascist protected by political and corporate fascist . Your anti-American fascist masters pick those who are worthy of Justice . Hence the people gathering in the street.

Landotfree's picture

Sorry I have no master other than God.   Good luck.  He was part of the club and now he is mad because he got kicked out, which I suspect is basically happened to the rest fo them.  

He/they was/were/are Wall Street bloodsucker just like the rest of them.

fuu's picture

Chock full of truthiness!

redrob25's picture



I don't care about insider trading and haven't since college when one of my business professors point out that insider trading is part of the free market and can often be an important part of real price discovery. insiders have the best information about their investments. 

if that is all that DI was kicked out for, then I am ok with it. 

Landotfree's picture

I don't really care either that is the funny part, but what they said on CNBC was actually true.  Basically they are mad because they got kicked out oif the club, they don't think there is anything wrong with the club, they are just mad they are not a part of it.  See what is really funny is they were part of the "fight club", they got kicked out... now they are breaking the golden rule... you don't talk about fight club.   

I find the whole thing funny as hell.  

ISEEIT's picture

A. No way to confirm what you claim.

B. If true, this is a private site and 'Tyler' has every right (and reason) to remain anonymous.

C. You are an idiot.

Landotfree's picture

I never said he/they could or could not remain anonymous.   One of the contributors has already admitted to it and he was in fact doing insider trading.   Now you can go on with your strawman argument.


JailBank's picture

What if Tyler IS Cramer?

johngaltfla's picture

IF Tyler is Cramer, I want to know about Erin Burnett's poontang tattoo....

Archduke's picture

hopefully Tyler(s) are pseudonymous, meaning he(she/they) has(have) reliable reputation capital.

ie you can trust that persons posting as tyler are the same tyler next time.  but this ultimately

doesn't matter, as in the worst case each tyler post should be treated for validity on its own merit.

I think I need to buy a gun's picture

cnbc just did a thing about u guys


SheepDog-One's picture

Its funny how CNBC is trying to make ZH look like some kind of new thing out of the blue, and of course therefore no credibility is insinuated.

ZH must be really annoying someone.

Internet Tough Guy's picture

Regulation? That's commie talk; the only way to make the market fair is to eliminate the rules. Only with pure opacity will we achieve objective, Randian truth and efficiency. 

jdelano's picture

Yup.  I'm sick of everything.  It's just a sea of BS out there.  'Apple's iphone4S just opened the door to competitors'--hahahahah, right.  France will have the Dexia situation all wrapped up by Thursday and solution will not affect credit rating.   haahahahaha--okay.  ADP number is an indication that things aren't so bad.   hahahahha---of course it is, what an accurate and consistent track record the ADP number has.  

10 minutes of MSM is like getting sodomized with a spent fuel rod.  toxic.  

Hmm...'s picture

'Apple's iphone4S just opened the door to competitors'

Could you clarify.  Do you think that this is BS because Apple didn't open the door to competitors, or is it because you think Apple already opened the door to competitors?

(as I recall, Android is a more popular OS than iOS, so perhaps that is your meaning?).

FWIW: we have an iPhone and an Evo in my household.  (My work pays for an Evo, spouse for iPhone).  I also have a Dell laptop and a Mac laptop.  And an Ipad.  However, my favorite piece of technology BY FAR is the Nook (with E-ink).

the iPhone is way more polished and integrated.  the Evo is simply a more powerful phone.
The Evo has voice to text, an awesome GPS navigation program, it's faster, and it's much much cheaper per month as I get unlimited everything.  The iPhone is pretty, and polished, and smooth.  It's also more user friendly usually (although sometimes the one button thing fails).

Thus: I personally think that in some ways Apple is playing catch up (technology wise), but there is no question that it is the most stylish and popular phone.  In other words: the door is clearly open... and Apple dropped the bar with this major disappoint.

Just like Mercedes vs Infiniti.  IMO Mercedes has more cache... but infiniti arguably has a better product.

Lastly, I'm not a disciple of either phone.  I have no attachment to my phone.  It's just a stupid phone.

jdelano's picture

I don't care about phones either and don't have a vested interest in Apple.  My point just that calling this a "Major disappoint" and insinuating that Apple's market share growth is now in jeopardy is a hyperbolic load of crap meant to move the stock.  there is already a bit of competition in the market.


as to mercedes and infiinity--on that one I'd have to disagree with you.  A better product?  Are you kidding?  Ifinities drive like Sea Rays with tricycle wheels.... 

Stormtower's picture

Ok. CNBC just called out ZH for starting rumors about Morgan Stanley and causing a 20% drop. Then they go on to say the Tyler is a ghost, maybe a foreign operative. Fucking funny, coming from the biggest rumor mill on the planet.

Hmm...'s picture

Here's what's irritating.

1) ZeroHedge IS an anonymous blogger

2) his/her/their rumer DID help take down Morgan Sanley

so truthiness.


There is a very clear reason WHY an anonymous blogger can take down Morgan Stanley.  It's because all the banks have opaque balance sheets and liberal "accounting" and so none of us know what the F is going on over there. 

After all the lies, only anonymous bloggers are able/willing to give accurate attempts at valuation.

CNBC totally misses THAT aspect of the story.

A market works best with transparency where all participants have an access to accurate information.  ZH simply has better information than so called analysts.

oogs66's picture

liesman broke the "grand plan" last week...stocks went up 7% in 24 hours...they were all congratulating themselves...saying how great they were, not one recommended selling, look at how much money they cost their viewers

oogs66's picture

actually worse information, with fewer resources, but uses it better...

Internet Tough Guy's picture

Did they call out the FT for spreading market-raising rumors at the end of every trading day?

Sambo's picture

Next it is Reggie's turn to be accused of causing a Gonemint Sachs crash.

Sambo's picture

Next it is Reggie's turn to be accused of causing a Gonemint Sachs crash.

SheepDog-One's picture

Yea not to mention CNBC are the biggest stock pumping sellout Wall St whores on the planet.

scatterbrains's picture

I'm sure they are dying to classify ZH as a propagandist/bank terrorist where upon it becomes justified for national security to send some drones overhead.

fuu's picture

The drones infest the comments already.

jdelano's picture

MS going to talk to Mitsu and send some ninja assasins after the Tylers now.  Maybe you guys can hole up at Carson Block's joint for a while?

LasVegasDave's picture

Arent you the russian guy who got banned from the securities industry?

C'mon Kernan, you can do better than that!

ToNYC's picture


Mike Milken had some brains too. Too cool for school. joe. Please sit in the back.

Everybodys All American's picture

Cramer is the most corrupt sob on the planet.

bigwavedave's picture

Peter, you can use MF CDS as a proxy for CME if your so inclined

papaswamp's picture

bewbs....I'm sorry what did you say?

ToNYC's picture

"Once they sing your song, they'll want to know who you are."

- Paul Robeson to Harry Belafonte

Moneyswirth's picture

Yeah.  CNBC calling out ZH for starting "rumors".  Meanwhile, Tyler pointed out in a post last week how the bank's own 10Ks show that their exposure to Europe is TEN GAZILLION times its capital.  

If CNBC officially changes its name to Pravda West I might consider taking them seriously.  On second thought, maybe I wont.


jdelano's picture

Pravda West.  Teehee.  Or just Pravda!