Comments on: Socialist Calculation Meets the OTC Markets http://streetwiseprofessor.com/?p=3196 Research (on Financial Markets) Conducted by Other Means Mon, 06 Sep 2010 15:16:44 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Regulation of OTC Derivatives « Prof. Jayanth R. Varma’s Financial Markets Blog http://streetwiseprofessor.com/?p=3196&cpage=1#comment-72100 Regulation of OTC Derivatives « Prof. Jayanth R. Varma’s Financial Markets Blog Tue, 12 Jan 2010 09:05:17 +0000 http://streetwiseprofessor.com/?p=3196#comment-72100 [...] trading platforms, as well as post-trade price transparency. I like this report though the Streetwise Professor thinks that this is tantamount to socialist [...] [...] trading platforms, as well as post-trade price transparency. I like this report though the Streetwise Professor thinks that this is tantamount to socialist [...]

]]> By: Martin http://streetwiseprofessor.com/?p=3196&cpage=1#comment-72086 Martin Mon, 11 Jan 2010 13:48:25 +0000 http://streetwiseprofessor.com/?p=3196#comment-72086 I've long thought the most useful thing a regulator could do re OTCs is to act as clearing house of volume information. That is, if I'm a trader of OTC widget swaps, I'd report my daily volumes to my regulator, who'd then publish a summary of everybody's OTC widget trades yesterday. I could then see if my 10 widget trades a week make me 30% or 0.0003% of the global OTC widget market. This would tell me at least two helpful things. How small or big would a dominant player need to be (and am I that player)? And: can I really exit all my positions at the market price in one day, as my mark-to-market accounting policy assumes I can? If not, best I talk to my CRO and CAO quickly. I can see lots of problems with this, however. First, it would take mega$$$$ to build. It needn't, but it would. Second, I might not believe the regulator's numbers anyway. What if gizmo volumes got mixed up with widgets by mistake? Third, this information is very, very confidential. Is it definitely, definitely safe off my premises? Fourth, re the two matters I said this could help me with, an on-the-ball regulator could help me already even without building anything, if its market teams know their onions (and it's not necessarily their fault if they don't). The most worrying thing you can ever find between the lines of an official report is - we must do Something - This is Something - so we'll do This. Hmmm. I’ve long thought the most useful thing a regulator could do re OTCs is to act as clearing house of volume information.

That is, if I’m a trader of OTC widget swaps, I’d report my daily volumes to my regulator, who’d then publish a summary of everybody’s OTC widget trades yesterday.

I could then see if my 10 widget trades a week make me 30% or 0.0003% of the global OTC widget market.

This would tell me at least two helpful things. How small or big would a dominant player need to be (and am I that player)? And: can I really exit all my positions at the market price in one day, as my mark-to-market accounting policy assumes I can? If not, best I talk to my CRO and CAO quickly.

I can see lots of problems with this, however.

First, it would take mega$$$$ to build. It needn’t, but it would.

Second, I might not believe the regulator’s numbers anyway. What if gizmo volumes got mixed up with widgets by mistake?

Third, this information is very, very confidential. Is it definitely, definitely safe off my premises?

Fourth, re the two matters I said this could help me with, an on-the-ball regulator could help me already even without building anything, if its market teams know their onions (and it’s not necessarily their fault if they don’t).

The most worrying thing you can ever find between the lines of an official report is

- we must do Something
- This is Something
- so we’ll do This.

Hmmm.

]]> By: Surya http://streetwiseprofessor.com/?p=3196&cpage=1#comment-72074 Surya Sun, 10 Jan 2010 04:18:07 +0000 http://streetwiseprofessor.com/?p=3196#comment-72074 http://online.wsj.com/article/SB10001424052748704130904574644693895033518.html?mod=rss_Today%27s_Most_Popular Found this Hank Greenberg interview interesting. http://online.wsj.com/article/SB10001424052748704130904574644693895033518.html?mod=rss_Today%27s_Most_Popular

Found this Hank Greenberg interview interesting.

]]> By: Surya http://streetwiseprofessor.com/?p=3196&cpage=1#comment-72073 Surya Sun, 10 Jan 2010 04:09:03 +0000 http://streetwiseprofessor.com/?p=3196#comment-72073 There are two main issues here. One is the information problem. The second is the too big to fail problem. In the decentralized situation, the participants can gamble at the risk of the tax payer and escape citing things like "our models failed", "we made a mistake" etc., That is there is the problem of lack of accountability. I believe that centralization can remove this problem - parties can be held responsible perhaps due to clarity/consensus of market prices. But then as you point out repeatedly this opens up a host of other problems. There are two main issues here. One is the information problem. The second is the too big to fail problem. In the decentralized situation, the participants can gamble at the risk of the tax payer and escape citing things like “our models failed”, “we made a mistake” etc., That is there is the problem of lack of accountability. I believe that centralization can remove this problem – parties can be held responsible perhaps due to clarity/consensus of market prices. But then as you point out repeatedly this opens up a host of other problems.

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