Susquehanna Investment Group plans to bring its program trading techniques from the equity market to the municipal market.
The firm, through its Bodel Inc. affiliate, established a municipal bond arbitrage department and announced the hiring of two people yesterday.
Jon Fiebach joined Bodel from Axelrod Associates. Duncan Swezey moved from First American Municipals. Two employees already with the firm, Jim Doughan and Kai Huang, Will switch to the municipals department.
"We'r,e excited about the business, and we think there's opportunity there," said Doughan, an associate director at Bodel, in an interview yesterday.
Bond arbitrageurs use quantitative techniques to ferret out inefficiencies in the pricing of related securities, such as a Treasury bond and an option on that bond. In a simple trade, an arbitrageur simultaneously buys one security and sells another in an attempt to capture the inefficiencies and lock in a profit.
Some arbitrage activity involves far more complicated strategies derived from chaos theory, games theory, and cutting edge math and computer research.
Given the wide spreads and other inefficiencies in the municipal market, it is a natural for program trading techniques, market professionals say.
Susquehanna has generally been known as an equity arbitrage firm. For the week ending Feb. 4, for example, the New York Stock Exchange reported that Susquehanna was the fourth most active firm in program trading. Most of the firm's activity involved index arbitrage - buying and selling baskets of stocks and futures, the exchange reported.
But the firm has previously ventured into the convertible bond and Treasury repo markets, sources said.
The firm also stepped beyond its equity root in 1992, forming an alliance with chase Manhattan Bank to trade foreign currency options.
The move into the municipal arena, "makes a lot of sense, said a bond arbitrageur at another firm. "They can put the methods they perfected in the stock market to good use in many other areas."
Currently, Smith Barney Shearson runs the largest municipal bond arbitrage group. A Smith Barney official declined to comment.
Market professionals said there is plenty of room for Susquehanna in the municipal market. The volume of arbitrage transactions by existing players typically prepresents only a small fraction of the market's activity, said they.
In the equity market, program trading accounted for 5% to 10% of daily volume. For the week ending Feb. 4., for example, the New York Stock Exchange reported all program trading accounted for 7% of the market's total volume.
