With signs of stress already flashing across global markets, the coronavirus is underscoring an ugly reality for Wall Street banks: It’s harder to handle trading risks from outside the office.
As banks including JPMorgan Chase & Co. and Bank of America Corp. split up their trading teams and ask staff to work from home, they’re likely to lose some ability to react quickly to market moves and take on big positions. If others follow suit, that will mean less liquidity to absorb a wave of sell orders from investors, potentially exacerbating price drops and even raising the possibility of creating a vicious circle.
Add in exchanges and clearinghouses that aren’t fully staffed, and it’s enough to make even hardened trading veterans nervous.
“There’s more possibility for a self-feeding kind of event,” said Craig Pirrong, a finance professor at the University of Houston. Traders won’t be able to share information and coordinate in the ways they’re used to, he said, “so that will likely make them more cautious and supply less liquidity to the market.”
One bank executive said his firm may lower risk limits when traders are separated. If others follow, that will mean less capacity for investors looking to sell in less liquid markets.
A lower risk appetite may also result from banks’ reduced ability to monitor traders to ward off any wrongdoing. Firms will provide recorded mobile phones for staff working at home, but it’s hard to replicate the full suite of compliance measures.
In the equities markets, much of the buying and selling is done by high-frequency trading firms that rely on powerful computers and hardware only available at the office. If they can’t be fully staffed, they may be less active.
And residential internet service often runs at a fraction of the speed that’s available to businesses. While WiFi security has been improving, home networks are notoriously more vulnerable to hackers than company systems. Typically, a corporate network will be behind a security firewall, and access usually requires two- or even three-factor authentication, using methods like passwords, PIN codes, mobile-phone verification and fingerprint scans.
In the bond world, liquidity during a downturn is already an issue. Banks that have long acted as middlemen have been reducing the size of their inventories over the course of the past decade.
Risk assets have whipsawed this week, with traders on edge amid a rise in virus cases, government quarantines and travel restrictions, and a raft of company warnings on the impact to earnings. Global equities are about 10% below the all-time high reached last month, and the yield on 10-year U.S. Treasuries slumped below 0.75% Friday.
U.S. credit markets posted their worst day in a decade on concern some companies won’t be able to repay debt. Investors this week withdrew the most cash in at least 10 years from U.S. funds that buy corporate bonds and loans.
Money markets, too, are showing signs of anxiety. On Tuesday, the Federal Reserve’s repo operations — designed to address short-term funding shortages — were oversubscribed for the first time since October, a trend that continued the following day.
Financial firms were scrambling to get funding for even one day. Dealers asked for more overnight cash than the Fed was offering Friday in their system repurchase agreement operation. The Fed’s been temporarily adding liquidity through repos backed by Treasuries and other securities as collateral since mid-September, when a funding squeeze caused repo rates to surge.
On Thursday, contracts on European lending rates slumped as traders added options to protect against a further slide. And Friday, a key proxy for U.S. banking risk soared to its highest in almost six months. Meanwhile, a measure of perceived risk in corporate credit surged by the most since at least 2011 as the premium paid for investment-grade bonds rose to the highest in a year.
JPMorgan, Morgan Stanley, Bank of America and Danish lender Danske Bank are dividing their sales and trading workers, sending some employees to back-up locations to reduce disruptions if employees are exposed to the virus, people briefed on the plans said. JPMorgan and Wells Fargo & Co. restricted non-essential domestic travel, Goldman Sachs Group Inc. is planning to split workers among rotating teams and Royal Bank of Canada turned a conference scheduled for next week into a virtual event.
The main exchanges in Chicago are poised to limit staff levels at their physical headquarters. Cboe Global Markets Inc. said it’s prepared to shut its Chicago trading pits and operate the options exchange in an “electronic only trading mode” if the virus situation escalates. CME Group Inc. is asking employees to test their ability to work remotely, and said that if the trading floor needs to shut, its Globex electronic trading system will continue to operate.
While many in the financial services industry are familiar with working from home, the men and women buying and selling stocks, bonds, currencies and commodities with customers aren’t, said Kevin McPartland, head of market structure and technology research at Greenwich Associates.
“Traders are not used to working remotely because they don’t do that,” he said.
— With assistance by Adam Haigh, Michelle F Davis, Alex Harris, Edward Bolingbroke, Scott Moritz, Molly Smith, Claire Boston, Alyce Andres, and Liz McCormick
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