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Posts Tagged ‘TRACE’

Adding Fuel to Goldman Exec Greg Smith’s Fire

Posted by Larry Doyle on March 18th, 2012 10:06 AM |

Former Goldman executive Greg Smith created quite a firestorm on Wall Street this week. Smith tarred and feathered his former firm for the manner in which they engage their clients.

While I believe Smith should have been more pointed in directing his fire, for those impugning Mr. Smith, including New York City Mayor Michael Bloomberg, I would offer that what Mr. Smith asserts is HIGHLY unlikely just a Goldman issue.

Why do you think JP Morgan’s CEO and Morgan Stanley’s CEO James Gorman informed their troops to hold their own fire in response to the bombshell launched by Mr. Smith?  (more…)

FINRA’s ‘2009 Year in Review’: INCOMPLETE

Posted by Larry Doyle on June 22nd, 2010 10:32 AM |

What good is a 2009 Annual Report released in September 2010?

Picture a student informing his teacher that he has not been able to complete his 75-page year end review, but that he will surely get it done over the summer and “I’ll have it for you when school starts back up in September.” Additionally, the student tries to ingratiate his teacher by submitting a 6-page summary year in review. If this were not so pathetic it may actually be comical, but my friends this is what we are subjected to by the Wall Street self-regulator FINRA. How so?

FINRA Chairman and CEO Rick Ketchum just released a magnanimous 6-page 2009 Year in Review while informing America that the full 2009 FINRA Annual Report will not be released until September.

American citizens and investors are experiencing one of the most dramatic, traumatic, and anxiety-ridden financial and economic period in our nation’s history, and all we get is a 6-page summary.

The FINRA 2009 Year in Review will not take long to critique, but suffice it to say the grade on this review will certainly be “INCOMPLETE.” (more…)

Michel Barnier and Michel Petite, Read Sense on Cents

Posted by Larry Doyle on May 17th, 2010 3:39 PM |

Does Michael Barnier, the European Union’s financial services commissioner, read Sense on Cents? If he doesn’t, he should. Why?

Today he touched upon an approach to dealing with credit derivatives which Sense on Cents made months ago. Bloomberg highlights, CDS Traders Face Disclosure Requirements in Europe,

Sovereign credit-default swap transactions face mandatory disclosure rules in the wake of the Greek debt crisis, the European Union’s financial services commissioner said today. (more…)

Wall Street’s Oligopoly Flexes Its Muscle

Posted by Larry Doyle on March 15th, 2010 12:51 PM |

Pricing power is everything.

What businessman wouldn’t like greater control and influence over the pricing of his goods and services? How are prices determined? In a capitalist system, prices are a function of the competitive forces of supply and demand. What happens when competition dwindles? Pricing power for the suppliers increases. How does competition dwindle? When barriers to entry are so high, or competitors go out of business. This economic reality is also known as an oligopoly and it defines the current state of our financial industry known as Wall Street.

Is Wall Street taking advantage of the lessened competition and flexing its muscle to drive revenue? Is the Pope Catholic? (more…)

Hedge Fund Collusion to Pound Euro?

Posted by Larry Doyle on March 3rd, 2010 12:35 PM |

Meeting industry friends and colleagues for dinner, drinks, and market talk is standard fare. In fact, I would say it is good business as it is important to develop relationships within the industry.

That said, the development of these professional relationships and the interaction amongst the professionals should never come at the expense of professional ethics and integrity. I did witness more than a handful of times individuals from different shops on both the buy-side and the sell-side of the industry push the envelope very close and sometimes over that ethical line.

Not always, but very often, the ethical shortcomings involved hedge funds. Why? The revenue model for hedge funds (typically 2% asset management fee and 20% of profits derived) serves as a huge incentive for traders at hedge funds to gain an edge and act upon it as much as possible. The fact that the hedge fund traders and managers have a direct stake and an accompanying vested interest in the profits fuels this crowd like nothing else. (more…)

Real-Time Information Is “Everything” on Wall Street

Posted by Larry Doyle on October 7th, 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.

LD

Custom Derivatives are the Darkest Corner of the Wall Street Casino

Posted by Larry Doyle on August 31st, 2009 4:16 PM |

Why is it that Wall Street is lobbying VERY heavily to delay and dilute expected reforms for the derivatives market? Well, given that Wall Street is making multiple billions in this space, it is not difficult to understand that the industry will spend millions to protect the franchise. In fact, the industry has been aggressively lobbying to maintain the veil of secrecy on this segment of the market.

The profits generated in this space are centered on 5 banks:  JP Morgan, Goldman Sachs, Citigroup, Morgan Stanley, and BofA. Bloomberg takes a peek into the highly profitable but excessively opaque world of derivatives in writing, Wall Street Stealth Lobby Defends $35 Billion Derivatives Haul:

Wall Street is suiting up for a battle to protect one of its richest fiefdoms, the $592 trillion over-the-counter derivatives market that is facing the biggest overhaul since its creation 30 years ago.

The Washington fight, conducted mostly behind closed doors, has been overshadowed by the noisy debate over health care. That’s fine with investment bankers, who for years quietly wielded their financial and lobbying clout on Capitol Hill to kill efforts to regulate derivatives. This time could be different. The reason: widespread public and Congressional anger over the role derivatives such as credit-default swaps played in the worst financial crisis since the Great Depression.

Wall Street would clearly like to keep the derivatives enterprise running in a ‘business as usual’ format. How might some light shine into this corner of the casino? Require the banks to report trading activity. I detailed this topic in July when writing, “Can We TRACE JP Morgan’s Business?”:

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 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.

I won’t make many friends on Wall Street, and perhaps lose some of my current friends, but TRACE should be implemented across all product lines. For those involved in the markets, please access the TRACE system to gain a wealth of pricing data while keeping your brokers and financial planners honest!!

Bloomberg offers a similar sentiment today in writing:

“Part of the pull and tug is that the banks are trying to prevent more and more of the product from being commoditized in the sense of being exchange-traded,” said Charles Peabody, an analyst at Portales Partners LLC in New York, which provides institutional equity research. “Like anything that starts to get commoditized — we’ve seen that with Trace on the bond side — it’s obviously going to pressure margins.”

Trace, shorthand for the Trade Reporting and Compliance Engine, was created in 2002 to post prices on all registered corporate bonds 15 minutes after trades occur. The public disclosure meant bond dealers no longer had better price data than clients, and profit margins in the business shrank by more than 50 percent, according to a Bloomberg News review of trades and a study published by the Rochester, New York-based Journal of Financial Economics.

If derivatives were required to be reported via TRACE and also had to be settled via a clearance system, would AIG have been able to take such massive systemic risk? Doubtful. Yet, Wall Street wants to keep the lights dimmed in this corner of the casino. Will they ever learn?

LD






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