Derivatives traders replaced with machines

Human Costs

As late as 2005, managing directors on credit-derivative trading desks were being paid an average $250,000 in salaries and $1.75 million in bonuses, Michael Karp, co-founder of executive-search firm Options Group, said in a 2006 interview with Bloomberg News.

Building an algorithm may cost a few hundred thousand dollars, said Tchir, a former credit-derivatives trader.

Elsewhere in credit markets, Dow Chemical Co., the largest U.S. chemical company by sales, is planning its first benchmark bond issue this year. Volkswagen AG, Europe’s biggest carmaker, sold 2.5 billion euros ($3.2 billion) in bonds that will automatically convert to shares at maturity to boost liquidity following the purchases of Porsche and Ducati.

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, rose 0.22 basis point to 10 basis points as of 11:48 a.m. in New York. The gauge, which widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds, has climbed from 8 basis points on Oct. 17, the lowest intra-day level in Bloomberg data back to 1988.

Credit Benchmarks

The Markit CDX investment-grade index, a credit swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, fell 0.5 basis point to a mid- price of 96.4 basis points, according to prices compiled by Bloomberg.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 3.3 to 126.2.

The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bonds of Itau Unibanco Holding SA are the most actively traded dollar-denominated corporate securities by dealers today, with 234 trades of $1 million or more as of 11:50 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Brazil’s biggest bank by market value sold $1.87 billion of 5.125 percent subordinated notes yesterday that are due in May 2023, Bloomberg data show.

Dow Offering

Dow, the maker of chemical, plastic and agricultural products, may offer 10-year securities and 30-year debt as soon as today, according to a person familiar with the transaction, who asked not to be identified because terms aren’t set. Benchmark offerings are typically at least $500 million.

The company last issued benchmark debt in November 2011, selling $1.25 billion of 4.125 percent, 10-year notes and $750 million of 5.25 percent, 30-year bonds, according to data compiled by Bloomberg. The bonds due November 2021 traded at 109.4 cents on the dollar to yield 2.94 percent on Nov. 1, Trace data show.

Volkswagen’s three-year notes will pay an annual coupon of 5.5 percent, the Wolfsburg, Germany-based automaker said in a statement today. The minimum conversion price has been set at 154.50 euros and the maximum at 185.40 euros.

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