Quick Question about LTCM

U

user83248324

Hi,

So a I understand it LTCM was an arbitrage firm that bought less liquid bonds(ie, 29 year bonds) and sold more liquid bonds(30 year bonds) and waited for them to converge in price when the 30 year bond would become a 29 year bond and become less liquid. I am wondering how they were able to place these trades before they collapsed, without the bid and ask spread ruling out any profit since they were trading such huge volumes in illiquid bonds?

Thanks for any help you can provide...
 
Quote from user83248324:

Hi,

So a I understand it LTCM was an arbitrage firm that bought less liquid bonds(ie, 29 year bonds) and sold more liquid bonds(30 year bonds) and waited for them to converge in price when the 30 year bond would become a 29 year bond and become less liquid. I am wondering how they were able to place these trades before they collapsed, without the bid and ask spread ruling out any profit since they were trading such huge volumes in illiquid bonds?

Thanks for any help you can provide...
More...

They don't hit the bid like retail investors do. There is a natural tendancy for institutions to want to hold 30 year bonds and they probably negotiated good prices.
 
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