Neil A. O’Hara, author and journalist, writes about financial topics including hedge funds, trading and securities services for a professional and mainstream audience. Mr. O’Hara is the author of record for the 6th Edition of “The Fundamentals of Municipal Bonds” (John Wiley & Sons, 2011).
Collateralised loan obligations (CLOs) were among the first segments of the securitisation market to bounce back after the financial crisis. Prices tanked in late 2008 and early 2009 when investors feared the recession would push up corporate default rates—but the concerns proved overblown. Although returns on CLO equity varied by manager, the credit support mechanisms built into the structure kept even the worst deals current on their debt capital. Robust performance resuscitated investor interest in CLOs, but regulators could stall the revival.
Algorithms have come a long way since the early days when traders used simple volume weighted average price (VWAP) routines to facilitate execution in large cap stocks. Technology has helped, of course; computers can now process so much data in near real time that programmers can incorporate feedback from the market to alter the way algorithms execute or route orders on the fly. Attitudes toward algorithms have evolved, too.
In an ideal world, no trader would ever betray a directional bias by crossing the bid-offer spread. Better to sit on the bid—or lurk in dark pools, where execution is often at the mid-point between bid and offer, revealing nothing. Time is of the essence, though, and delay increases the opportunity cost if the price moves against the trader. Little wonder that as market volatility has tumbled in recent months dark pools have grabbed a bigger share of volume in US equities.