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I am not sure I understand everything you wrote.
The larger players in the financial markets actually take much less
risk, relative to their size and, more importantly, their capital base,
than smaller players. Larger firms are mostly hedged, profiting from
flow activities that produce commissions and from arbitrage activities
that attempt to scratch out profits by taking advantage of pricing
discrepancies between similar positions. They evaluate their entire
inventory, piece-meal in real time and globally on a daily basis, to
ensure they can easily handle an extreme market move both from a pure
p&l perspective and from a credit perspective.
Small players are more prone to bankruptcy because they are
under-capitalized for the level of risk they are taking; they to make
investments in risk-monitoring tools (and perhaps a lack of
understanding of why they need them). Here is a question for the
traders on this list: how many of you know the ten largest market
moves, relevant for the time period and the contracts you trade, over
the last ten years, and evaluate your trading to ensure you can
withstand such a move? (I am sure some of you do this, even without
realizing it, when you look at long term drawdowns for your strategies;
I am also confident that many don't do anything like this.)
Turning now to the provision of liquidity, it has little to do with a
'guarantee that those reckless fellows go home financially safe and
sound'; the big players do this themselves using the techniques I have
mentioned above. It has everything to do with making them 'ready to
return the next day to continue their reckless profit-making.' A market
only exists if both buyers and sellers are able to make their trading
decisions without extreme pressures. For the big players, a riskless
position, eg, long stocks and short futures, can still require a
significant amount of liquidity. The Fed knows this, and accommodates
this in times of extreme volatility. By doing so, it allows everyone to
have a market to trade into.
I worked for an investment bank when the Japanese stock market was at
the top of its bubble. It held large positions in OTC puts on the
Nikkei purchased from Japanese banks. We closely evaluated the amount
of credit exposure we would have had in total and against each
individual bank under the scenario that the market moved as expected
(eg, down), and would close out options to ensure the potential
exposure was never too big.
It may give people comfort to think that the big players are
manipulating the market at every turn. As we have seen recently, some
players are prepared to abuse others. But the success of the biggest
firms is due to good risk management, not manipulation. It is my belief
that many of those assume manipulation have little understanding of how
the big players operate.
Regards
DanG
Christine Zarycky wrote:
<blockquote type="cite"
cite="">
"... for those unprepared..."
Why is it that those who are left 'in charge' of our
markets are unprepared? The market does not move THAT
much on any single day and usually the large moves are
in the general direction of the trend existing at the
time. It would only cost a miniscule amount of their
profits to be insulated from the risks that ultimately
all of us do bear. And because of the fact that these
powers that be ARE unprepared, liquidity is truly
nonexistent on those very, very rare occasions when
those same powers that be are supposed to be providing
it. But rest assured that the fed will be there in
order to guarantee that those reckless fellows go home
financially safe and sound, ready to return the next
day to continue their reckless profit-making.
Thanks for providing a sound argument for us moron
conspiracy theorists.
Christine
--- Adrian Pitt <apitt@xxxxxxxxxxxxx> wrote:
Who knows what might happen if there was no support
mechanisms....I dont
think the answer is really that hard to work out.
It would be a vicious
world...many firms would go belly up..many people
would become
unemployed, but life would go on....there would be
enormous short term
hardship for those unprepared. But out of
destruction would come new
growth...just like after a fire rages through a
forest....capitalism
works...support or no support...
Adrian
-----Original Message-----
From: p8 [mailto:pwh112358@xxxxxxxxxxx]
Sent: Thursday, 20 November 2003 3:14 PM
To: realtraders@xxxxxxxxxxxxxxx
Subject: [RT] Re: Fed supporting market
The idea does give a warm and fuzzy feeling.
In reality the so-called free market can't seem to
stay 100% free
for a long time without being intervened sooner or
later by the
government. The "free" market tends to behave in a
pendulum-like
fashion, swinging perpetually from left to right
(too much
intervension vs no intervension) and passing that
center point only
in a fleeting moment.
Could you provide a lasting, real-life example of a
100% free,
unadulterated market?
-p8
--- In realtraders@xxxxxxxxxxxxxxx, Code 2
<Code2@xxxx> wrote:
...<snip>...
A free and unencumbered market can do a better job
of deciding who
should thrive and who shouldn't.
...<snip>...
----- Original Message -----
From: Dan Goncharoff
To: realtraders@xxxxxxxxxxxxxxx
Sent: Wednesday, November 19, 2003 10:44 AM
Subject: Re: [RT] Re: Fed supporting market
Because the purpose of the government is to
ensure that the
market exists the next day. That is why liquidity is
provided.
As you yourself point out, some players went
bankrupt, even a
big bank, and survived. As you also point out, the
market stopped
functioning, and there was no way to hedge.
The specialists with negative balances were
deciding to commit
yet more capital, in a situation where they taken
significant losses
already, to 'provide a bottom'. How did they know it
was the right
decision to buy when they did? They were taking yet
more risk, and
could have been wrong.
Regards
DanG
Ira wrote:
During the Crash of 87 there were futures, the
S&P was traded and
options
on futures as well as the OEX. As for being
bankrupt, many broker
dealers
on the NYSE as well a market makers on the NASDAQ
and on the
options floors
and Specialists were carrying negative balances.
In fact a bank
in Chicago
did finally go belly up. There were many that
didn't get the
benefit of
that very favorable government loan treatment and
lost millions on
that day.
I personally know of one person that lost $80
million and another
who lost
$20 million in a couple of hours. To lose a
million on that day
was no big
trick. There was no way to hedge because every
time you went to
hedge they
would stop trading that item. With unlimited
borrowing power many
specialist firms were allowed to stay in business
with negative
balances and
provide a bottom to that market. Options on the
OEX that were
almost 100
points out of the money were quoted as high as
$65 and there were
no
sellers for several hours. What happened to the
American way
then? Why
not let those that took the unlimited risk go the
way they should,
bankrupt,
and those that did have limited risk or those that
were short reap
the full
benefit of their positions? Once again the
government stepped in
to protect
the privileged and the political favoritism goes
on. Will the Fed
and Bush
let the Dow go to 5000 in an election year? How
much pressure is
placed
upon the Fed by the party in power? No one really
knows except
those in
power. All I can relay is what I have seen
happen. The rest is
just guess
work by those trying to find a reason.
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