Matt Levine’s Money Stuff: Trading Firms’ Job Is Service

People are worried about the basis trade

One model is that some trades want to be done with a lot of leverage. Here’s one:

1. I buy a $1 million Treasury bond.
2. I sell you a $1 million Treasury futures contract, promising to deliver my bond to you in a year at a fixed price.

My risk, in this trade, is very low. If the value of the Treasury bond goes up or down, it doesn’t matter to me: I’ve promised to deliver it to you at a fixed price in a year, and you’ve promised to buy it from me ...