Saturday, October 22, 2005

NEW CODE OF CONDUCT FOR THE HIGH YIELD BOND MARKET

By Corey Anders, Managing Director, high yield bond sales, Glomster & Co., New York, NY

Once upon a time, the high yield bond market was inhabited by gentlemen. I'm talking about the white shoe, blue blood days when decent guys like the bond salesman narrator of The Great Gatsby made bond sales an honorable occupation. But what, my friends, has become of us? How have we ended up here, where business is a kill-or-be-killed, dog-eat-dog, and devil- take-the-hindmost state of affairs? I certainly don't want to turn the clock back to those days when stiff patrician, prissy pricks ran the markets like some genteel tea party; but at the same time, we can not go without some sense of protocol, decorum, rules of civility, if you will. I mean, hell, before you know it the high yield market will have descended to the slimey, dank depths currently occupied by the municipal bond market.

How did we get here, to this state of junlge warfare? Some blame the hedge funds. Before the hedgies came along like hordes of Visigoths banging at the gates, the high yield market was run by insurance companies and mutual funds. These guys, for the most part, were straight arrows who followed the rules, guys who never failed to vote or slow when the traffic light turned yellow. Of course, Mephistopheles Mike Milken had his way with them, corrupted them, but still these old school guys abided by an unspoken code of conduct.

Can we reinstill a code of conduct into our market? Will the twenty-something punk hedge fund trader, who cut his teeth playing video games where you get points by running over pedestrians, ever really "get it."

I am sorry to tell my buy-side buddies that the onus lies on them, as this deterioration of etiquette is mostly their fault. After all, sell-side guys are expected to err on the side of sleaze. Sales guys have always pushed the envelope of propriety. We expect more from the other side of the street, the buy-side. We expect the buy-siders to uphold the standards of conduct. Buy guys used to compensate themselves with a self-sense of dignity and decency that partly, only partly, made up for their inferiority of income vis-a-vis their sell-side brethern. "The sell-side might pick us off on a regular basis," they use to say to themselves, "but at least we can look ourselves in the mirror every morning." Yeah, right....anyway, that noble way of thinking kept a semblence of moral order within the high yield universe. The barbarians were stopped at the gate. So it's up to you, buysiders, to save us.

Herewith is my effort to establish some rules of behaviour in our market:

Rule 1) IDEAS MEAN TRADES: When I give you an idea, Mr. Buy Guy, and you decide to act on it, you trade with me. Not the lazy ass Morgan Stanley salesman, lounging with his feet propped on the desk, waiting for the phone to ring. Nobody throws capital around in this market anymore. The only capital that means anything nowadays is intellectual capital. It's all I gots, homey. So when I tee the Great Idea up for you and you decide to send it down the fairway of alpha returns, how about giving me a call with an order? And I don't mean the usual order that I get from you, namely, "Don't bug me today, Corey."

Rule 2) YOU WANT INFO, YOU GIVE INFO: Don't call me up with sixty-five questions about some situation and, after I have dutifully answered them, then say that you have to hop. I don't mind telling you what kind of a seller I have, if he's a hedgie or mutal fund guy, what his thinking is, whether he's puttingon a short or not, how long he's had this position, does he take cream in his coffee, whatever...I don't mind answering those questions as long as you give me info back. Like, what are you thinking, what do you have in mind. You must have something in mind to ask me all these questions. Just give me a fucking hint, will ya!

Rule 3) NO NEW ISSUE WHINING: When a deal is ten times oversubscribed, don't whine when I tell you that you're getting $1mm instead of the $10mm that you put in for. (And we both know, without saying it, that all you really wanted was $5mm.) Such whining is especially unseemly considering that I can count on one hand the number of trades you've done with me the past three months. You wanna play, you gotta trade. And it doesn't help your case when you put your order in at the fity-ninth minute of the eleventh hour, just before the books close and it's a given that the deal has been done. That's called piling on.

Rule 4) IF YOU ARE GONNA FLIP, GIVE ME A TIP: Hey, if you don't plan to hold the million of new issue paper you got allocated after it breaks, just be upfront with me. Honest, I won't hold it against you if you are a flipper. I just ask that you show the bonds to me when you decide to sell. Dance with who brung you to the shindig.

Rule 5) TRACE SUCKS! And you thought TRACE was going to give you an edge over me. Now you realize that you can't bullshit me anymore the way I used to bullshit you. Transparency doesn't really do either one of us any good. All TRACE does is create trading logjams. So don't come at me all the time with what just traced. Let's just pretend that TRACE doesn't exits. We'll all get along better. You cover your eyes and I'll cover mine. You bullshit me, I'll bullshit you and we'll get more done and have alot more fun besides.

Rule 6) DON'T PUT AN ORDER OUT TO MULTIPLE BROKERS. Listen, dumb ass, you are hurting yourself. I can't tell you the number of times that I've taken your order to buy bonds to an account and the guy on the other end says to me, "Hey Corey, you're the third broker today who's called me to buy this piece of shit credit. Must be something going on. I'm holding onto what I got." It takes me about five minutes of snooping to realize that you've given the same order to two other bucket shops, who are shopping that order around like it's a fifty dollar whore. Just desserts when you get hit on all three orders and you end up buying three times the bonds that you wanted.

Rule 7) DON'T SIZE ME UNLESS YOU ARE READY TO TRADE: When I give you a market or firm bid or ask, and you ask me how many, and I tell you, then I expect a firm bid or offer from you in return. Don't tell me that you'll "be back in a few" or that you'll think about it. When I drop my pants for you and show you what I got, then I want more than a hand job.

Rule 8) I'M NOT ENTERTAINING YOU BECAUSE I THINK YOU ARE A GREAT GUY: Look Buyside Buddy, I do like you, maybe even think of you as a real friend, despite the fact that sometimes you can be a real pain in my ass. But I'm not taking you to the best restaurants in New York, sitting you in courtside seats at the Knicks games, covering your $2,000 ante fee at the montly Texas Hold Em Poker Tourney, all because I think you are so swell. I'm doing it because I expect something in return. DUH....And so what if it's not coming out my wallet but the firm's; it's the thought that counts. Let's just say that there is a gradation of tit for tat. The $1,000 tab at The Four Seasons for you and a few of your research monkeys, for example, should get me a $5mm order the next day. The annual two day golf outing at Shinnecock, well, that should result in your calling me when you want to dump your $25mm position in some crappy auto supplier. And when I take you to the local Korean massage parlor for "a rub and a tug," let's just say that you really owe me. (Certainly implicit in all this is that the greater the degree of illegality in my entertaining you, the more you owe me in directed business. )

Rule 9) DON'T MAKE ME LOOK LIKE A JACKASS: That's easy enough to do, I know. But you see a lot more than I do since you are seeing levels from about two dozen brokers. So don't give me an order that you know is way off the mark, just to see if I can find some clueless dummy out there. It's impossible for one blind man to find another one even more blind. You are wasting both our time and making me look stupid to all my accounts.

Rule 10) DON'T HOLD ME UP FOR A 1/4 OF A POINT WHEN WE ARE TRYING TO TRADE SOME DISTRESSED CREDIT THAT IS EITHER GOING TO ZERO OR PAR. I can't tell you the number of times that a trade on a distressed bond died over a quarter of a point. We can't close the gap on bond trading with a 30's handle? We are going to die 35 1/4 to 35 1/2? Are you kidding me? If you are buying this bond, you have to think it's going tens of points higher. So why are you walking away 1/4 of point from buying it? And, on the other hand, if you are the seller, you probably think the bond is as worthless as wall-paper. Like Nike says, Just do it! and move on to the next one.

I guess ten is enough, for a start. And I'm sure my buy-side buddies have plenty to say as to how the sell-side can improve its behaviour. I'm all ears for that. In short, like that great humanitarian, Rodney King said, "Can't we all just get along?" Sure we can. And we can all still make plenty of dough to boot, without driving each other bananas.

4 comments:

Anonymous said...

Response from the buy-side.

Rule 1) IDEAS MEAN TRADES: When some asshole from Pressprich calls me and says his analyst is taking a look at Polypore bonds (it could be interesting!) I pay about as much attention as I do when my mother-in-law calls me with a hot “tip”. Unless the tip is a new way of talking her daughter out of her panties, I’m not even listening as she (or you) goes through your canned bullet points which amount to no more than a description of the pretty pictures in the annual report. I’m usually surfing internet porn when I tell you “I’ll take a look”, and by the time I’ve hung up the phone I’ve already forgotten that you called. And since you call and suggest every goddamn name that is trading, don’t be surprised when I actually decide to buy a bond that you recommended. Just rest assured that you had about as much to do with the idea as the guy who cold calls me to explain the latest Bloomberg function. I’ll buy the bonds from whoever has the lowest price; I’m not a fucking idiot….

Rule 2) YOU WANT THE INFO, YOU GIVE INFO: When I want a TREO 650, I walk over to the Verizon store on Boylston Street. I ask the bitch that works there how much they cost, how they work, how many people are buying them, and what he thinks about them. Unless he tells me something shocking, like the TREO will make my cinnamon ring fall out, I don’t really care what he thinks. When he is done speaking and I turn around and walk out the door without saying a word, he knows I don’t want one. If I say “bag it up skippy” he knows I do. That’s his fucking hint.

Rule 3) NO NEW ISSUE WHINING: The example you give is implausible. Not ONCE in my career have I gotten a cutback in proportion to the supposed oversubscription. Usually my bond salesman tells me the deal is 10x oversubscribed, but they are going to widen the deal 200 basis points out of the kindness of their fucking hearts. In these situations you can be rest assured that I am going to get filled because “I am such a good customer.” Then you guys can cover your short by buying back the $20 mm extra bonds I got after it falls 10 points before it even settles. Yes, I pad my orders. If it really is a good deal and I want $10 mm, I put in for $100 mm. Invariably I get $1 mm. Doesn’t matter if I was the first order, doesn’t matter if I flip or not, I get fucked. Amazingly, your prop desk seems to have a lot of bonds for sale at $105 in the gray market…

Rule 4) IF YOU ARE GOING TO FLIP, GIVE ME A TIP: Actually, after you fuck me by giving my 1% of the bonds I actually needed so that the position is meaningless, I wouldn’t hit you unless your bid was a half point above the cover; sometimes I am a fucking idiot.

Rule 5) TRACE SUCKS! You already had TRACE, except it was called an inter-dealer broker. So don’t complain now that the playing field is level. However, overall I agree with you on the trading logjams.

Rule 6) DON’T PUT AN ORDER OUT TO MULTIPLE BROKERS: Word. Only insurance companies and newbies are stupid enough to do this.

Rule 7) DON’T SIZE ME UNLESS YOU ARE READY TO TRADE: If you are giving me a firm bid, and I ask you how many you want there, you may end up wishing you had checked TRACE before I say "that's done".

Rule 8) I’M NOT ENTERTAINING YOU BECAUSE I THINK YOU ARE A GREAT GUY: Look Sellside Sal, I’d rather sit in obstructed view with my friends than in the front row with you. If you want some business, send me some shitty tickets and stay home. The next time I need to buy some vanilla high yield, and you have the best price, I’ll do the trade with you.

Rule 9) DON’T MAKE ME LOOK LIKE A JACKASS: If I’m giving you an illiquid bond to sell at a price that is apparently 4 points above the market, rest assured that some scumbag dealer (thinking I was looking to BUY) gave me that price. I’m only giving YOU the order because you sent me the 40th row tickets to Blue Man Group.

Rule 10) DON’T HOLD ME UP FOR ¼ OF A POINT WHEN WE ARE TRYING TO TRADE SOME DISTRESSED CREDIT THAT IS EITHER GOING TO ZERO OR PAR: This is why your backup plan is a broadband internet salesman at Comcast. A ¼ point is a bigger commission on a $30 bond than it is on a par bond. Unfortunately, to prove this I would need to introduce you to division, multiplication’s tricky counterpart.


BBBOOOOOYAAAA KAASSHHHAAAAA

Anonymous said...

Now there you have it....A buysider with some wit and humor. Will wonders never cease!

Anonymous said...

Is there anybody left on the sell side? I thought all the guys who could do joined up handwriting had left to join hedge funds.

Nick Goreman said...

True, the surest sign that the hedge fund universe has topped out and seen its best day. Too crowded with too many amateurs.