LIQUIDITY AND MARKET STRUCTURESEric Bushell, Chief Investment OfficerSignature Global Asset Management

AGENDA

1) Regulatory reform- Volcker Rule- New risk weights for trading assets- Dealer adaptation

2) Changes to exchange trading- High-frequency trading- Smaller orders, higher volume- Overwhelming the system

3) Impact on market participants- Higher costs- Lower liquidity- Higher volatility

4) Signature’s approach- Expect market dislocations- Be a liquidity provider

Source: Bloomberg

LEVERAGE LIQUIDATION SWAMPED MARKET CAPACITY

VOLCKER CLOSES THE CASINO IN DEPOSIT TAKING INSTITUTIONS

Source: International Monetary Fund

BANK CAPITAL CHARGES WITH NEW RISK WEIGHTS

DEALERS’ WAREHOUSE CAPACITY SHRINKS

Source : Citi

Volatility to increase

U.S. CREDIT FUNDS VS. DEALER INVENTORY

Source: Morgan Stanley

DEALERS ADAPT TO NEW REGULATIONS

RISE OF ELECTRONIC TRADING ALGORITHMIC TRADING SPLINTERS ORDERS

Source: Bloomberg

RISE OF ELECTRONIC TRADINGBLOCK TRADES % OF U.S. TRADING

Source: Bloomberg

TRADING VOLUME BY INVESTOR TYPE

Source: Bloomberg

EXCHANGE MARKET SHARE OVER TIME

CI SPONSORS EXCHANGE COMPETITION IN CANADA

• Leverage ratio hurts bond liquidity

• Wall Street to exit commodities trading

• OTC derivatives overhaul

• More margin (cost) for users

WHO IS NEXT? – COMMODITY AND DERIVATIVE MARKETS

INVESTMENT IMPLICATIONS

• Expect market dislocations

• Be a liquidity provider

• Seize scarce liquidity events

• Be tactical – active

• Structurally high cash levels

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