The Markit CDX.IG.

NA (last letters = investment grade North America) is an index that one can buy or sell credit default swap protection on. When it first started trading, in September of 2007, it had 125 credits in it. Heres the full list. It had Fannie, Freddie, CIT Group, and WaMu, so now it actually trades with 121 reference entities, not 125. Every 6 months, credit indices like this one roll, which just means that a new series of the index starts trading, and the names contained in it shuffle around so that they always meet the requirements of that index. For example, investment grade indices should contain investment grade names. The credits also need to meet certain standards of liquidity when trading on a standalone, single-name basis. And so on. The most recent index is the CDX.NA.IG.18. Full list here. The most recent index is referred to as being on-the-run and its usually the most liquid of all the indices. All the old indices are off-the-run. The CDX.NA.IG.9 (the 9s) are still somewhat liquid because there were in a lot of CDOs, used to hedge CDOs, the indices that came immediately after the 9s had their liquidity impeded by the crisis, etc, etc. Hence the 9s are a bit special. They are offthe-run. So as far as JP Morgan is concerned, these are long-term hedges. So, reputational risk aside, are these really positions to bet against? After all, if the $100bn position that was referred to in the Bloomberg piece is gross notional, that sounds about right for the size of JP Morgans exposure anyway. As of March 30, 2012, there was $884bn gross in total on the index (untranched), and JP Morgan is a huge player in this space. Skew trading is where one buys or sells protection on the index, while simultaneously selling or buying an equivalent amount of exposure to the underlying credits. All 121 of them in the case of the CDX.NA.IG.9.
The price of the index is quoted in yield spreads, which rise along with the perceived likelihood of increased corporate defaults.

Their maturities are a year apart -- S9 10Y matures December 2017, S17 5Y matures December 2016.
A graphical investigation

The amount of net notional exposure to the CDX.NA.IG.9 index has increased an impressive amount lately, according to DTCC data:

Thats quite a lot for an off-the-run index. Especially since the CDOs which a lot of trades on the 9s involve are maturing.
Perhaps this explains why JPMorgan's CDS has remained relatively wide while its exuberant stock price shot up on stress-test ebullience - only to plummet back to CDS reality this evening. Critically, JPM will need to use whatever method they can to hedge this now over-hedged and over-long position - which likely means credit instruments such as JNK, HYG, HY18, and IG18 will all get their share of strange attraction as the trader mispriced not just the basis risk (the volatility between the hedge and its underlying) but the attraction of running with a trend when you have a bottomless pit of money to cover it - until now.

Outright skew trading is rather niche. Banks do it with their books around the margin, as part of hedging (old) CDO structures and the current book they are running, but the hedge fund players that just do this arent all that many.

Heres what source 3 above (publicly available data from DTCCs trade information warehouse) looks like:

By going to the DTCC website one can get information on gross and net notional, like in the above screenshot. Reuters takes the data and makes charts like this:

So, what is that? Well, its the tranche version of the index, which looks like this:

See how the net notional on the index has gone way up and the tranche notional really hasnt? While a little tranche trade goes a long way, in terms of the leverage it adds to any view of the index, the above charts make us sceptical about the relative quantum of tranches versus index activity. That said, these are massively aggregated figures, so we might just be missing something thats buried in there. They are even aggregated across contracts of different maturities. If a single trader were taking equally sized notional positions in different contract maturities, which is risky, wed never know. Put differently, we wouldnt know if there were massive contracts of a long-term maturity if they are offset by short-term contracts. The logic here is that when there is a credit event that triggers the contracts as long as it isnt a restructuring, but rather a bankruptcy or failure to pay then all the contracts trigger and get paid out equally, regardless of maturity. In this way, net notional represents the maximum payout in a credit event. Another problem, though, is that tranches, which have different amounts of subordination, dont aggregate so cleanly in other words, that which affects the equity tranche does not trigger a payout in the mezzanine above that. Given how uninformed you may now be feeling about net notional data from DTCC, lets show you data source 4 (MarkitSERV trading activity data):

This shows daily trading activity in the index. It shows the activity increasing like no ones business from January to about early April-ish, then it peters out. Hmm something went all quiet like. The MarkitSERV data is beautiful in that it is daily and is available on a tenor-bytenor basis. The bad news is that we have no idea how much of the activity is down to new trades versus terminations, since both types of event count as activity. It is also not available for tranches. DTCC also do activity data, but its weekly and not available by maturity or tranche by tranche. Were also at a loss about how to even get a time series. Its all stored in individual files and no platform that we know of stores it. In any case, tranche trading usually drives index trading, as the indices are often used to hedge tranches. As a side note: hedging tranches with other tranches at different levels of subordination, rather than using the index, is mega bad news. Hedging tranches with other tranches at different maturities, like with a curve trade, is somewhat less crazy.

http://ftalphaville.ft.com/blog/2012/05/12/997121/what-positiontransparency/?ftcamp=traffic/email/content/booster//memmkt

In short, we thought this particular curve trade was a flattener, that being a type of trade which allows one to take a bearish view. If you had such a trade in place in the fall of 2011, you would have done well for yourself, thanks to general turmoil in the markets. What followed after that though, in 2012, is all together different. To get a sense of curve trading, consider this curve, which is for the most recent incarnation of the Markit CDX.NA.IG, an investment grade credit index that contains 125 North American corporates:

The whole curve moving down would mean that these corporates are regarded as more creditworthy, i.e. spreads have tightened. The curve being more steep is also generally good because it means that the near term is less risky, the longer term is more risky primarily because theres more time for things to go wrong. The curve flattens when things look bad even in the near term. Curves can completely invert when the view is that if the corporate (or sovereign) can manage to survive some immediate obstacles and not implode, things will probably get better or at least less bad. To give a specific example, FT Alphaville discussed back in November how anyone who placed a flattener on Italy, even just a few months beforehand, would have made some serious money when the curve flattened and then inverted:

Meanwhile, whoever was doing the selling was probably getting cold feet. As we mentioned, they probably stopped rebalancing the hedge, which probably let to increased risk and losses. From JP Morgans 10-Q: Since March 31, 2012, CIO has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. Theres another problem too. There are four credits in the Markit CDX.NA.IG.9 that are especially wide: Radian, MBIA, Sprint Nextel, and R.R. Donnelley & Sons. If one is outright long or short, the idiosyncratic risk around these names would have to be actively (expensively) managed.
To really get a sense of this though, one has to look at the skew as a percentage of the index:

Its also possible that some recent trends in tranche trading were contributing to this.

Investors complained that Iksils trades drove price moves in the $10 trillion market, affecting bondholders who use the instruments to hedge hundreds of billions of dollars of fixed-income holdings. His massive selling of protection on the index caused its spread to be a lot lower than it should be relative to the single names, making the index expensive relative to intrinsics (fair-value).

The situation is far worse because 1) any efforts to unwind such a huge position will lead to the market widening, --illiquidity costs from large bid-ask spreads; and 2) the rest of the world knows their position the hedge funds would likely push their position. It is already evident in the on-the-run liquid indices - HY18 for instance has exploded wider twice now - in line with the net notional reduction and hedging moves from JPM's IG9 position.

This chart represents how far above 'fair' the spread of the index trades relative to the underlying names - the spikes show that there was huge technical demand for the index protection relative to the underlying risk of the portfolio

He may have offset the risk of index contracts expiring in December 2017 by buying similar protection using contracts that mature this December, traders said. In such a strategy, the firm effectively would be paid the difference between those two trades, an amount that for the full index was about $41,000 for every $10 million of protection at the end of March, according to prices from data provider CMA. As the gap narrows, the market value of the trade gains. As it widens, the value declines.

The gap on the full index widened to $51,800 per $10 million on May 10 and jumped even more to $65,800 the day after JPMorgans disclosure, prices from CMA show. Iksil didnt respond to an e-mail seeking comment.