What the heck is the ABX?

From the Wall Street Journal:

Index With Odd Name Has Wall Street Glued;
Morning ABX.HE Dose
June 21, 2007; Page C1

When an upstart company called Markit Group Ltd. started indexes of the subprime-mortgage market last year, there was no fanfare.

They were called the ABX.HE indexes, and for many months, most investors had no idea of the market measures with the wonky name.

Now, the indexes are some of the most closely watched barometers on Wall Street. They are a focal point for trading in the U.S. subprime-debt markets — which lately have come to dominate attention on Wall Street because of problems at two big Bear Stearns Cos. hedge funds.

Founded and run by a former bank credit-trading executive, 45-year-old Lance Uggla, the Markit firm — with the backing of 13 of the world’s biggest banks — is helping turn the opaque world of credit trading into a high-volume and more transparent business. The ABX.HE indexes that it runs are acting as a barometer of the subprime market and also allow investors to trade credit protection against that market.

The ABX.HE name is derived from asset-backed index and home equity. The indexes track credit-default swaps — essentially insurance policies against default — tied to mortgage loans granted to Americans with poor credit histories.

An unexpected increase in ABX prices this spring, after a plunge tied to increasing loan delinquencies by subprime borrowers, helped contribute to losses at the two hedge funds managed by Bear Stearns, which led the firm to scramble for a rescue plan in recent days. Because of the Bear situation and subprime-market concerns, the riskiest portion of the ABX index hit record-low territory this week.

Lehman Brothers Holdings Inc. used the index to help hedge against losses. And Deutsche Bank AG told investors last month that it benefited from using the index in the first quarter.

The bank bet on a decline in the subprime market and sold short “the ABX index because our traders felt that the U.S. mortgage market was probably overheating and was potentially going to soften,” Chief Financial Officer Anthony Di lorio told investors on a conference call. He declined to specify how much the bank made on the trade.

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