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Real-Time Information Is “Everything” on Wall Street

Posted by Larry Doyle on October 7, 2009 3:45 PM |

One of the overriding reasons why I left First Boston in 1990 to join Bear Stearns was Bear’s advanced real-time risk management system. This system allowed me the ability to more proactively manage my trading risk. In the process, I was able to take more risk in the pursuit of greater profit. I became familiar with Bear’s system during the recruiting and interviewing process and was flabbergasted to realize how far behind First Boston was in its capabilities.

Real-time risk management and real-time data processing are critically important for thorough and proper oversight of any financial enterprise. A regulator will be lost in an attempt to maintain market oversight without the proper systems and access to real-time data.

Having heard and read of the systems deficiencies at both the SEC and FINRA, I am concerned at how far behind the curve these regulators are right now and how long it will take for them to recover.

While pondering this topic, I read in Securities Industry News that the SEC is looking to capture real-time data on derivatives transactions. This commentary, SEC Wants to Gather Real-Time Data on Swaps, addresses the exact topic I broached on July 17th in writing, “Can We ‘TRACE’ JP Morgan’s Business?” I wrote:

There is little to no transparency in the world of customized derivatives and as a result the bid-ask spreads are very wide. Cha-ching, cha-ching. Jamie (Dimon) and his friends on Wall Street are working extremely hard to keep it this way.

In their defense, it is likely not functionally feasible to move many customized derivatives to an exchange. What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine.  This system currently only covers transactions within the cash markets and not derivatives.  What does that mean for investors? No transparency and price discovery for investors in the customized derivatives space. As such, Jamie and friends can keep those bid-ask spreads nice and wide and ring up huge profits in the process.

Securities Industry News writes:

The Securities and Exchange Commission told Congress today to grant regulators “direct access to real-time data” on credit default swaps (CDS) and other derivatives.

The request comes, the agency said, because the lack of such information hampered its efforts to investigate potential fraud and market manipulation in the over-the-counter (OTC) derivatives markets during last fall’s financial crisis.

The SEC’s enforcement actions in investigating market manipulation in OTC derivatives “were seriously complicated by the lack of a mechanism for promptly obtaining critical information – who traded, how much, and when – that is complete and accurate,” said Henry Hu, the director of the SEC’s new division of risk, strategy and financial innovation, in written testimony to the House Financial Services Committee.

Hu testified that “data on securities-related OTC derivative transactions were not readily available, and needed to be reconstructed manually.” He asked Congress to expand the SEC’s inspection authority over trade data repositories and clearinghouses for derivatives.

The comments represented a rebuke to industry efforts aimed thus far at making more information on CDS and other OTC derivatives data more readily available.

What do we learn here? Information is EVERYTHING!! Wall Street is fighting tooth and nail to protect its golden goose within the derivatives space by hoarding this information.

Why is the SEC even asking for the information? If anybody in Washington truly had a set of cojones, they would merely TELL Wall Street how it is going to work going forward . . . take the information, and fulfill their responsibility to protect the public interest.


  • fiscalliberal

    Since I am new to the jargon of the finance industry et. al. It seems to me that the clarifying issue would be that if they go to the government for bailout, a claw back exists for the last 5 years and future of all executive compensation and the board.

    The House Science and Technology subcommittee had a excellent session on Risk software which was very enlightening. To a man they all said, the VAR software was a feel good indicator, subject to history used and MANAGEMENT INTERPRETATION. It was a tool and not a definitive answer.

    So – in the end it is management who is to assess, take and manage risk. If the senior management gets into trouble requireing a government bail out, they need to have a personal stake in the failure of their system which they have complete control.

    This rule will also have the effect of strengthening the board as their compensation would be open to claw back.

    • Larry Doyle

      Fiscal…I concur. Under this approach, it would be interesting to see which board members decide to resign rather than be subject to this liability.

      The fact is, though, we need real corporate governance and it has been severely lacking.

      • fiscalliberal

        Could it be that a board resignation would be a clear signal to the stock holders that something is not right. I would think that would be a form of leverage on a errant CEO.

        The key is that we need to empower the boards to do the due dilligence they are supposed to provide

  • Mark G.

    “If anybody in Washington truly had a set of cojones”

    Therein lies the rub.

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