In attempting to profit at JP Morgan's expense, these market participants confirm what your humble blogger has said that the most direct and effective method for implementing the Volcker Rule and eliminating proprietary trading is to require banks to provide ultra transparency.
Under ultra transparency, banks have to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details. It is precisely this information that the article says market participants need to successfully trade against JP Morgan.
If banks knew they had to provide ultra transparency, they would not take proprietary positions because they know the market would profit at their expense.
There is a new game in the financial markets: guessing the size and specifics of J.P. Morgan Chase & Co.'s losing trade.
The bank has remained tight-lipped since disclosing on Thursday that it had lost more than $2 billion on bad derivatives trades.
That has presented a challenge for hedge funds and other asset managers: If they can figure out how much the bank still holds and the components of its trades, they may be able to figure out how to profit from that information.
Hedge funds and others who already have profited by taking the other side of J.P. Morgan's big trades said they spent the weekend strategizing.
J.P. Morgan's Chief Investment Office, which was responsible for the trades, still holds tens of billions of dollars worth of derivatives positions in the form of credit-default swaps, said people close to the matter. The losses for the bank appear to have grown worse since it first announced the problem as key derivatives indexes moved against it.
On Friday the bank likely lost about $150 million, according to people familiar with the matter. And the damage likely grew on Monday, the traders say.
One index in focus is the CDX IG 9. Traders say Bruno Michel Iksil, the J.P. Morgan's trader dubbed the "London Whale," was a big player in this index earlier this year.
The problem: J.P. Morgan may have sold billions of dollars of default protection on this index at lower rates than are being charged now, traders say. When the cost of insurance rises, as it has lately, J.P. Morgan's paper losses deepen, they say.
The cost of buying 10-year protection on this index, the CDX IG 9 maturing in 2017, climbed to $148,000 on Monday, up from $139,000 at the close on Friday and $112,000 at the beginning of April, according to data provider Markit.
A key will be whether J.P. Morgan decides to unload its trades, or hold on in hopes that prices improve.
A spokesman for J.P. Morgan declined to explain the trades, but said the bank plans to provide more transparency about the positions at the end of this quarter.