This Is Where All The IT Investment Pays Off.
Via naked capitalism was reading George Soros and others commenting on the potential melt down that could occur in credit default swap markets, and while the doom-day scenario being painted is juicy, what really caught my attention was the description of the trading system being used for bids and offers on the swaps.
Apparently the traders, who are essentially acting as bookies, receive the bids and offers via an email in their Inbox. Throughout the day, market makers send out hundreds of emails and then the bookies filter and search through their inbox trying to figure out the current market price for a debt swap. There are no electric boards, no accurate pricing, just the stuff that you may (or may not) have received in your inbox.
And the market makers love this. They love the fact that most players have no visibility on what's really going on. Bigger margins for them.
Banks send hedge funds, insurance companies and other institutional investors e-mails throughout the day with bid and offer prices, [hedge fund advisor Tim] Backshall says. For many investors, this system is a headache.
To find the price of a swap on Ford Motor Co. debt, for example, even sophisticated investors might have to search through all of their daily e-mails, he says.
``It's terribly primitive,'' Backshall says. ``The only way you and I could get a level of prices is searching for Ford in our inbox. This is no joke.''
Banks have a vested interest in keeping the swaps market opaque, says Das, the former Citigroup banker. As dealers, the banks see a high volume of transactions, giving them an edge over other buyers and sellers.
``Dealers get higher profitability through lack of transparency,'' Das says. ``Since customers don't necessarily know where the market is, you can charge them much wider margins.''
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