Skip to main content

Derivatives watch

A couple of interesting recent developments in the derivatives market. Here's the scoop.

Yesterday, the Financial Times reported on a new credit derivatives platform that would allow market participants to obtain prices for derivatives contracts more quickly and efficiently.

From, "New process for credit derivatives":

A new process for trading portfolios of credit derivatives via electronic auction has been tested by banks and a leading hedge fund in recent days – a development that could provide another important cog in the infrastructure for this fast-growing market.

The new system, dubbed Q-Wixx, allows investors, such as hedge funds, to execute dozens of trades in credit derivatives with different dealers in a matter of minutes rather than relying on bilateral trading deals, which tend to take several hours.

The article goes on to say that the platform could be extended to include other products in the future. A companion piece, "Q-Wixx" shrinks the world" notes that such an advancement could further the trend of derivatives products being standardized and commoditized.

Also in FT, Tony Jackson noted yesterday that a new form of "irrational exuberance" has taken over the debt and derivatives market.

To say the debt markets have gone crazy is to miss the point. I suspect the great majority of sensible investors would agree, whatever they say in public. But that does not stop them piling into super-risky assets such as payment in kind bonds (PIKs) or the new form of derivative known as the constant proportion debt obligation (CPDO).

For all I know, that may be sensible - provided the madness lasts long enough for the fleet of foot to take their profits.

The problem, as he sees it, is that the signposts of mania are far less transparent in this arena than they were in the stock market of the 1990s. See the article for more.

And finally, Bloomberg reports that exchange-traded derivatives could offer an alternative in a market currently sown up by the banks.

Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc. risk losing their hammerlock on the most lucrative financial market when exchanges begin offering credit derivatives next year.

Paris-based Euronext NV, which is being bought by NYSE Group Inc., plans to create contracts based on credit-default swaps, making them cheaper to trade and easier to understand than the derivatives sold by banks. Credit-default swaps, used to speculate on credit quality, also top the product list for Chicago Mercantile Exchange Holdings Inc., the largest U.S. futures market, the Chicago Board Options Exchange and Frankfurt- based Eurex AG.

At stake are profits from the fastest growing financial market as exchanges list credit-default swaps alongside stocks, currencies and gold. Deutsche Bank says it earned at least $3 billion from credit derivatives in the first half of this year, about a third of total revenue from financial markets.

Hope this has helped you stay up to date on these trends.

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li

William O'Neil Interview: How to Buy Winning Stocks

Investor's B usiness Daily founder and veteran stock trader, William O'Neil share d his trading methods and insights on buying winning stocks in an in-depth IBD radio interview. Here are some highlights from William O'Neil's interview with IBD: William O'Neil's interest in the stock market began when he started working as a young adult.  "I say many times that I didn't get that much out of college. I didn't have much interest in the stock market until I graduated from college. When I got married, I had to look out into the future and get more serious. The investment world had some appeal and that's when I started studying it. I became a stock broker after I got out of the Air Force."    He moved to Los Angeles and started work in a stock broker's office with twenty other guys. When their phone leads from ads didn't pan out, O'Neil would take the leads and drive down to visit the prospective customers in person.