Quick Takes: US election live – What is trading?
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Ali Curi: Hi everyone. And welcome to ION Markets Quick Takes.

I'm Ali Curi and every week, along with my guests, Chris Barnes and Mark Bell, we take a quick dive into the headlines on the Clarus blog. Let's get started.

Hi, Chris. Hi, Mark. 

Chris Barnes: Hey, Ali. How are you doing? 

Mark Bell: Hey, Ali. How are you? 

Ali Curi: I'm doing great. Chris, let's start with you. What's your Quick Take for this week? Which headline from the Clarus FT blog would you like to discuss? 

Chris Barnes: Today, we're going to discuss a blog I published three weeks ago as of recording. It's going to be a little bit of an explanation about the work that went in behind the blog. The blog we're talking about is the "US election live — What is trading?" This is a fairly frequent feature that we do on the Clarus blog. When we know something is happening or something has happened, there's a natural inclination for market participants, whether they're middle office, back office, or actually at the coalface trading to kind of really want to know what is going on.

We can see all of the prices are flying around, but are actually any volumes trading? Are markets functioning as intended? Is liquidity there accessible and tradable? And so we've written a number of live blogs over the year. We always get really positive feedback about them from our readers.

So I just thought I'd go into a little bit about how it's not that easy actually to do this. I think we talk a lot and we write a lot about transparency in derivatives markets as this like panacea. It works. It helps markets function. It helps us to demonstrate that in times of stress, markets are not seizing up.

We can see when volumes are spiking and when they're not, etc. But I have to say, when you sit down and you actually try and write something like this, it's quite hard. Because derivatives markets are episodic. They trade not continually through the day, but in bouts of frenzied activity. Now, that's not the impression that market participants get when they look at just prices.

And that's because traditionally into dealer brokers are publishing prices in a quasi order book way, whereby your 10 year swap is constantly ticking, it's constantly ticking up and down, up and down, up and down, as if it's a future, as if it's an equity, but it's not. And you have to remember that we're dealing with substantially different trading behavior.

For example, swaps markets to FX, to futures, and also to cash bonds. And so when you sit down and you want to write a blog, first thing you want to know is, "How much have prices changed, right?" I'm sat there at 7am, "What has the likely election of Trump done to prices since I last looked last night?" And that is not a straightforward thing to do.

If you just sit down and think about it, you don't know the time of the last trade last night. You don't know what you're looking at. Are you looking for a client trade? Are you looking for a dealer trade? Are you looking for a standardized swap? Standardized swaps are not marked up as, "Hey, I'm a standardized swap. You should look at me in the data." 

And so there's actually a hell of a lot of work in the background that we need to do to be able to standardize the free data so that we can even begin to start looking at the structure of this blog. What am I talking about there? One, as I said, the most important thing is really flagging, "What is a standardized swap? How can I compare price of swap one to price of swap two?" We do that by flagging up all of the swaps that match a Bloomberg ticker. So I can go and analyze the data and say, I know what the Bloomberg ticker is for a 10 year dollar swap. I want to pull all of the prices for that.

As soon as you flagged that with a ticker, the rest of the analysis really falls out from that. So that then allows you to say, "Right, yesterday, I want to see the last price of the 10 year dollar swap." It means today I want to look at the open price. It means today I want to look at the last price, et cetera.

Now I cannot stress enough, none of these things come for free with the free data. I think there's a big misunderstanding out there about what is actually published. You know, people are aware that we have post trade transparency, but post trade transparency really is just a load of fields. It really takes a lot of data augmentation post publication of those fields to start to make sense of the data.

So that's number one. Number two is looking through all of the noise of that trading activity. And what do I mean by that? Well, if you look at election day, when we wrote the blog, we saw a record number of trades ever reported to the U.S. SDRs. It was over 5,200 trades. That was a record by six trades. So let's say kind of August and November were record times.

However, I think if you speak to anyone in the market, and this has certainly been the case three weeks after, were people looking for trading signals? Were they looking for structural changes as a result of the election? I think everybody would say, "Hell no." I think nobody really expected a big knee jerk reaction in markets to a Trump victory.

It was pretty priced in starting from September. And the types of trades we saw back in 2016, they were real shocks. And so we had massive steepening and nobody was expecting it. And also nobody knew what Trump would be like as a president. If he says something, does it happen or will he flip flop? Now, we're in a different scenario. And so whilst we saw a lot of trades, and we saw a decent amount of risk going through the market on a gross basis, speaking to market participants, it didn't feel like the type of move that was, "This is a structural move as a result of the election outcome." I think there was a lot of people saying, "Right, let's wait, let's see what happens. Let's see what the new team looks like, et cetera." And now that I'm standing here speaking three weeks after that's pretty much how it's played out in markets as well. Ten year swaps the day before the election on the blog closed at 378. Yesterday, the VWAP for 10 year swaps was 3.79, you know, nothing's changed really.

We are back to where we were. I'd actually say that 30 year swap spreads are less negative now. That would be kind of, you know, an unwind of a Trump trade, let's say. 5s, 10s is back in positive territory as well. So we have seen already a retracing of those moves. And again, this is why the SDR tools that we've built are so important, because the tools allow you to track those slower trends through the data, looking at volumes traded, as well as just doing all of this as like event risk.

Mark, I've kind of talked around the blog there. I haven't really talked about the content of the blog specifically. Do you have any specific questions about what I wrote on the day? 

Mark Bell: Thanks, Chris. I think that the first thing that was interesting in your comments was the comparison between the 2016 and 2024 elections, which were really in very different interest rate environments.

But, and perhaps, you know, in 2024, we understand or understood the impact of the change in parties better. I think firstly, just on the data itself, though, very little change in the two year rate. Does that really mean that the impact of a president is not going to be felt on short term rates?

Chris Barnes: I think it's a really good sign that two year rates didn't change. It means that The Fed should stay independent. It should be focused on monetary policy. The moves in the market were not focused on, "This is a president who favors a low rate environment." There is credibility of The Fed there. I think the long dated moves, 10 years and 30 years are all about fiscal policy.

But of course we're coming off the back of a president, in Biden, who had a very loose fiscal policy on the spending side, we're going into a president who is expected to have a loose fiscal policy on the taxation side. And so are the differences that great from one regime to the other? It's politics.

The swaps market is trying to see through the politics there, right? And really look at the likelihood of more long dated issuance really. And so the two year point was not a focus. 

Mark Bell: Which really does help us understand the 5, 10, 30s in terms of the movement, which did happen in the market. And whether it's what happens in the next four years or what could happen the next four years, it's and like you said, "It's politics." Maybe just one for the more retail one, but the 30 year swap move of 16 basis points really means that in the U.S., the long term fixed rate mortgage housing market was more expensive after the election. Maybe not what the voters or Trump really wanted or expected. 

Chris Barnes: Agreed. Another way of looking at it is that that is the bond market flexing its muscles, right?

But I would just caution that on election day, there was 30 year supply. All of the primary dealers had to buy a load of bonds from the U.S. Government on election day. So the appetite and the moves, and I mean, just terrible timing for an auction. Come on guys. So I wouldn't take it necessarily as an indication of policy, particularly as it came back a lot after the auction.

Ali, there's loads and loads and loads that we can cover, right? This is a single trading day, and yet we could talk for 20 minutes or 30 minutes about all of the moves and swaps and spreads, et cetera. I just encourage listeners to read the blog. This is an example of what you can do with the data and look forward to the next podcast.

Ali Curi: Great. Thank you, Chris. And please tell us again the title of your blog post. 

Chris Barnes: Well, it was a live blog, "US election live — What is trading?" I still think it's relevant to read and refresh and look at those moves even now. 

Ali Curi: All right, great, that works. Chris Barnes, Mark Bell. Thank you both for sharing your Quick Takes.

Let's do it again next week. 

Chris Barnes: Thanks, Ali. Looking forward to it. 

Mark Bell: Thanks, Ali. 

Ali Curi: And that's our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn. 

Thank you for joining us.