Basis trade shows challenge for watchdogs is to understand hedge funds and prime brokers as symbiotic organisms
Some weird stuff is forbidden in the US. It is illegal to bring live snakes to Mardi Gras in Louisiana. North Carolina forbids drunken bingo playing. But no law yet prohibits “recklessly impair the basis trade”. This is the esoteric misdeed imagined by Ken Griffin, chief executive of hedge fund group Citadel in a recent Financial Times interview. The basis trade is an arbitrage between the price of Treasuries and futures contracts on them.
It is true that $660bn of short positions sounds like a lot. But outstanding Treasuries are worth some $26tn. There are arguments on both sides on whether disorderly unwinds exacerbated wobbles dangerously in the Treasuries market in March 2020. Certainly, some basis traders lost their expensive shirts then. But as Foehrenbach wryly notes: “The world economy shut down around that time.” He adds: “Basis trades added to volatility. But they did not bring down the system.
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The real regulatory risk highlighted by a booming US Treasury arbitrageBasis trade shows challenge for watchdogs is to understand hedge funds and prime brokers as symbiotic organisms
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