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

The Dot-Com Bubble in 1 Chart: InfoSpace

With all the recent talk of a new bubble in the making, thanks in part to the Yellen Fed's continued easy money stance, I thought it'd be instructive to revisit our previous stock market bubble - in one quick chart.

So here's what a real stock market bubble looks like. 

Here's what a bubble *really* looks like. InfoSpace in 1999-2001. $QQQ$BCORpic.twitter.com/xjsMk433H7
— David Shvartsman (@FinanceTrends) February 24, 2015
For those of you who are a little too young to recall it, this is a chart of InfoSpace at the height of the Nasdaq dot-com bubble in 1999-2001. This fallen angel soared to fantastic heights only to plummet back down to earth as the bubble, and InfoSpace's shady business plan, turned to rubble.

As detailed in our post, "Round trip stocks: Momentum booms and busts", InfoSpace rocketed from under $100 a share to over $1,300 a share in less than six months. 

In a pattern common to many parabolic shooting stars, the stock soon peaked and began a…

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL! 

Please bookmark our new web address at Financetrendsletter.com

Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner.  



Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead!

As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter. You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter). 

Stay up to date with our real-time insights and updates on Twitter.

Moneyball: How the Red Sox Win Championships

Welcome, readers. To get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter.

The Boston Red Sox won their fourth World Series titleof the 21st century this week.

Having won their first Series in 86 years back in 2004, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it?

Quick background: in late 2002, team owner and hedge fund manager,John W. Henry(with his partners)bought the Boston Red Sox and its historic Fenway Park for a reported sum of $695 million.

Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship.

This brings us to one of my favorite scenes from the 2011 film, Moneyball, in which John W. Henry (played by Arliss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pitt) over to Boston with an excellent job off…