Derivatives provide a tool for investors to implement strategies for managing counterparty, market and liquidity risk. Order matching, i.e. the transfer of investors’ trading intentions into actual trades, price discovery and centralized clearing are at the heart of the production function of derivative markets. They thereby play a key role in market-based economies.
The recent financial crisis has shown that clear lines must be drawn between protecting investors and allowing market participants to freely express their opinions of securities prices. Short sales directly benefit stock markets by supporting price discovery and enhancing liquidity, and indirectly by facilitating operations for the alternative funds industry. At the same time, outsized short selling during volatile times can unfairly damage stock prices and create systemic economic risks. This note aims to help define the line between investor protection and unfettered short selling, which to date has proven to be a substantial challenge for regulators and markets alike.
In the waning days of 2008, governments and central banks worldwide—with the best of intentions—lurched from one ad hoc intervention to another, multiplying daily the amount of public funds deployed to shore up our faltering financial system. Pundits and academics criticized each approach and forecast the death of investment banking, securitization, community lending, and even in some cases capitalism. Hedge fund managers locked in clients, banks refused to lend, multilateral over-the-counter netting arrangements morphed into bilateral deals. Exiting, discredited, CEOs found that their parachutes refused to open. Pyramid schemes were “outed.” The public puzzled over the different bail-out treatment of seemingly similar market players. And, regulators cringed at the wreckage and tried to sweep up the debris.
But through it all, there was one lone ray of light: The performance of our domestic and international exchanges (ie, regulated markets)!
The financial crisis has created an exceptional circumstance in which to evaluate the quality of corporate online communications. As companies have been affected across the board, this has presented an opportunity to make a comparison between their online communication methods. We took the occasion to survey 51 of the world’s largest financial institutions and evaluate their online responses in October 2008 as significant events were unfolding.
In the regular round up of sector forecasts that industry magazines like to gather for the last issue of the year, Canada’s Marketing Magazine cornered a number of senior brand and advertising executives and asked them what the emphasis for brand marketing will be in 2009. An industry leader in Canada, Jack Bensimon of Bensimon Byrne characteristically led the pack of “experts” when he observed that “brands are increasingly sensitive to social, political and regulatory issues.” I doubt that there is anyone working in the Exchange Industry anywhere in the world today who wouldn’t agree with Mr. Bensimon.
In recent years, most security markets have experienced fragmentation. Besides traditional stock exchanges, trade could be done on new trading venues or within brokerage firm. In United States, Goldman Sachs, Morgan Stanley or UBS are some of the firms that have developed their own proprietary trading platforms. In Europe, “systemic internalisers”, which are investments firms executing client orders on their own account, are authorized since November 1st 2007. Most often, these new possibilities are offset by strict reporting obligations, for which specialized firms develop new services.
Volatility and risk are of central importance to those of us involved in finance. They lie at the center of virtually all of our work. Without volatility, without risk, finance would not exist as a subject in our business school curriculum, in our academic research. Finance, quite simply, would not be distinguishable from deterministic economics. Neither would finance departments in banks and industrial firms be endowed with anywhere near the importance that they currently have.