Monday, March 23, 2020

‘We don't want nobody that nobody sent.’ - the new standard for trading relationships


“On the way home from law school one night in 1948, I stopped by the ward headquarters in the ward where I lived...I walked in and I said, ‘I'd like to volunteer to work for [Adlai] Stevenson and [Paul] Douglas.’ This quintessential Chicago ward committeeman took the cigar out of his mouth and glared at me and said, ‘Who sent you?’ I said, ‘Nobody sent me.’ He put the cigar back in his mouth and he said, ‘We don't want nobody that nobody sent.’ This was the beginning of my political career in Chicago.”
-Abner Mikva former congressman, federal judge, law professor, and Presidential Medal of Freedom winner
I love this story of Chicago politics. It can be applied on so many levels, yet fundamentally it is all about who do you trust and how trust is established. The world changes when volatility and uncertainty reach extremes. Trading in pits through open outcry creating a trust environment. Using voice for transaction also creates a trust environment. When trading is done through anonymous algos, trust is based on an assumption that every other trader is the same. There is only an impersonal relationship. It is easier to pull the plug on an impersonal network.

The relationship networks that you use for transactions adapt to a new world. If volatility and uncertainty increase to high enough levels, technology may revert to the old and not use the new. For example, the ICE swap rates used across different 13 dollar maturities have only been published intermittently in March. It has been hard to get good firm electronic quotes. It is not the fault of ICE but market-making changes when there is too much volatility. Market-making capital will be conserved for “friends”. Quotes are being made by voice and those voice levels may vary by customer. 

Financial networks are shrinking to those you know and trust, and there is less business available in some venues through algo pricing. Anonymous algos are being turned off in order to conserve capital for higher quality clients. It is also being turned off for smaller less profitable clients. The conservation of liquidity is normal behavior in an uncertain world. Quotes are not firm; especially for those who are not good customers. Interestingly, pricing for standardized exchange-traded futures is better than pricing in the cash market. The old members who are part of the exchange club are more comfortable trading together than those markets that were usually over-the-counter. The exchange imposes trust and standardization. 

The value of trading relationships has returned. However, those who have been shunned will remember friends. Short-run conservation will tighten future networks which will result in a slow liquidity rebound. Counting friends is as valuable as counting profits and care is needed with finding your trading friends.

‘We don't want nobody that nobody sent.’

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