US Treasury Secretary Tim Geithner has finally laid down the law on over the counter (OTC) derivatives. He is going to push for them to be listed on exchanges, or cleared through registered clearing houses, or posted into a trade repository. But the most important thing Geithner is insisting upon is that they are traded electronically. Only by using electronic trading can there be transparency. Deals concluded over the phone, by fax and instant messaging should be things of the past. But the temptation by traders to rip someone else's face off through OTC dealings is too great. Traders are not in the game for any other reason than to make money. And none of Geithner's efforts can stop trading firms from inventing new and different derivatives, most of which - no matter how well regulated - will be beyond the scope of regulators' understanding. Transparency does not tend to make traders as much money as does opacity. As my friend and ex-boss Gerald Ashley said in his new book Financial Speculation*: "Many market players have an almost schizophrenic relationship with the market; wanting to know all that is going on, alternating between secrecy and publicity over own their positions and being constantly influenced by the opinions and actions of those around him. Now we can start to see why trading is a hard way to make money." And we can see why the regulators will have a hard time seeing through OTC derivatives.
*Financial Speculation is published by Harriman House. It is currently Number 2 on Amazon UK's Hot Future Releases List (www.financialspeculation.co.uk). Gerald Ashley has over thirty years experience in international financial markets, having worked for Baring Brothers in London and Hong Kong, and the Bank for International Settlements in Basel, Switzerland. He is now Managing Director of St. Mawgan & Co which he co-founded in 2001, a London-based consultancy specialising in risk management, strategy consulting, and behavioural finance modelling in finance, business and risk-taking.
I am pleased to hear Gerald Ashley has a new book out soon, I read his first book a couple of years ago and back then he talked a lot of common sense about the markets. It will be interesting to see how he explains the current financial melt down.
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