Comments on: The NYT takes on the derivatives cartel A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: pointsnfigures Mon, 13 Dec 2010 19:05:37 +0000 I wrote similarly at my blog, anks-clearing-and-over-the-counter-deriv atives/

Of course today the lean hog market went haywire. purely the cause of exchanges not being good caretakers to markets. ean-hogs-jump-computerized-trading-ruini ng-marketplace/

By: Danny_Black Mon, 13 Dec 2010 18:10:25 +0000 By the way, Duffie did a simple model of this: u.pdf

More extensively covered in:  /2009/01/index.htm

They call for a global CDS CCP but I remember they tried to build something like this for equities in the 90s – from recollection called Global Transaction Monitor or something like that – and it went the way of most large scale ambitious software projects.

vk9141, netting is not the same as centralised clearing nor does a CCP necessarily solve the issues you mention. There are software products that do compress trades – thinking TriOptima – without CCP. The other issue with netting is that with changing counterparty credit valuations the exposure can jump around on a MtM basis and more importantly can cause unexpected collateral calls. Also the number of exactly matching contracts is not necessarily that high. What there usually is is a tiny basis risk under normal circumstances but which can blow out under stress especially if your counterparty thinks you might go under.

By: Danny_Black Mon, 13 Dec 2010 17:40:14 +0000 LadyGodiva, try learning english too and re-reading. There are many many issues with OTC derivatives pricing and market making. The spreads are not one of them – in fact one can argue during the bubble for the risk market makers were taking on the spreads were too low, not too high. The ability to get a competitive quote from ALL the participents is not either. People in the market either use the electronic trading platforms provided or if they are voice broking they use this new-fangled device called the “phone”.

By: Danny_Black Mon, 13 Dec 2010 17:31:19 +0000 y2kurtus, agree with you too. Would also point out that he regularly has some very smart and knowledgeable people commenting on topics – for example in this post AEinCH.

By: LadyGodiva Mon, 13 Dec 2010 17:28:49 +0000 @Danny Black,

Let’s recap your arguments so far: 1) Trust me, derivatives pricing is fair; and, 2) transparency=socialism.

I’ve learned so much and it’s not even lunchtime. Thanks!

By: y2kurtus Mon, 13 Dec 2010 17:02:44 +0000 Felix,

I just wanted to say that your opening line with Chicago Fed and OTC derivatives clearing- HAD ME AT HELLO!

I read and enjoy your posts about art, wine, nyc, and all the rest… but I think I speak for a clear majority of your readers when I say we come back BECAUSE you are such a wonky financial journalist… not in spite of it!

Keep up the great posts on Basel, CLO’s, CDO’s, all things tax… all of it.

By: vk9141 Mon, 13 Dec 2010 16:38:31 +0000 Anyone who has ever witnessed a back office CDS settlements department will have seen (at all but the one or two best organized firms) a shambolic mess of spreadsheets, messy manual reconciliation, large backlogs of unconfirmed trades and can see the value of central clearing.

The market is a mess and no wonder the outstanding notionals got so ridiculously large before netting began properly after the crisis.

Being able to accurately and quickly identify how exposed the firms are to each other has to be a great leap forward.

By: Danny_Black Mon, 13 Dec 2010 15:44:51 +0000 LadyGodiva, sorry but in terms of price as stated above they can get plenty of quotes and are free to choose whoever offers the best **price** which doesn’t correlate with the guy with the lowest spread. To use Ms Story’s analogy, would you rather go with the guy who can sell your home for 250k with a 3% commission in a couple of weeks or prefer to go for the guy who might be able to get 200k after a few months for 1%? So by your argument, Google and Microsoft are simply leeches because they make much higher margin than swaps traders? I must remember that one.

As for charging what you can get away with, can we assume someone of your ironclad conscience and honesty has demanded they get paid 1c about starvation wages and not a cent more?

dbsmith1, not sure what market you worked in but no, transparency does not equal better price. I am sure REDI book charges less commission than Liquidnet but if I was selling a large block of stock I know which one I would choose to send the trade through.

PS Most OTC swaps traders would be happy with 1% too. You may want to check what the spreads are on IR and currency swaps….

By: LadyGodiva Mon, 13 Dec 2010 14:56:05 +0000 Not to put too fine a point on it, Danny Black, but you appear to believe that if your services add value then you get to extract whatever rent you feel like or can get away with. The clients have no right to know what your margins are (none of your damn business) or whether someone else could offer them a better deal. I suppose it doesn’t occur to you that businesses might have better uses for some of that capital, and that it makes a difference in the real economy (e.g. jobs, wages, growth, etc).

Thanks for your honesty. Same to dbsmith1, who, as a bonus, also appears to have a conscience–might want to have that looked into, as it is quite the handicap in financial services these days.

By: dbsmith1 Mon, 13 Dec 2010 14:30:45 +0000 @Danny_Black

“so you are saying that you were actively disadvantaging your customers during that time?”

I’m quite sure that, if either side of my deals — the buyers and sellers — knew what kind of fees I was able to extract, they would have said that I was “actively disadvantaging” them.

Note that I’m not saying intermediaries never add value — clearly they may. I’m just saying that, when there’s no immediate, transparent, price discovery, prices will be higher than they would be in a transparent market.

I could have survived quite nicely on a 1% spread instead of the 4-5% I got because no one knew all of the transaction economics except me!