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When Volumes Back Prices

12 October 2015 by lberuti

Sometimes large swings in prices are blamed on poor liquidity and it is a topic that often surfaces in debates around high frequency trading. But sometimes large swings in prices result from information which have the potential to change the game. This is exactly what happened a few weeks ago in the automotive industry. The admission by VW ( Volkswagen AG ) that they fitted some diesel cars with “defeat devices” aimed at cheating emissions testing paved the way for outsized fines and rocked investors’ (and consumers’) confidence. Many reassessed their exposure to automakers in general and to VW in particular. Risk changed hands at a rate never seen before. During the 4th week of September, daily volumes were in excess of $800mln on VW’s CDS alone and they were still in excess of $425m the following week. When things are hotting up in creditland, the CDS remains the instrument of choice to shift large amounts of risk.