October 7, 2008
Sean Park asks “now what ?”
My money’s on a move to public limit order driven markets, driven by regulation aimed at greater transparency. With a clearing house turning each match into two trades, exchanges remove counterparty risk. Tradeable prices can be observed intra and end of day, removing the mark to model problem. Outstanding interest in any contract is generally published too. Quite complex structures can be built with exchange traded contracts – see LIFFE ETO strategies.
Of course that leaves many questions. Will regulators ban the trading of certain risks ? What kind of participation should there be in any new exchanges ? What kind of future does Prime Brokerage DMA have ?