The immediacy implications of exchange organization

The paper introduces a connection between the needs of exchanges to respond to the immediacy needs of their clientele and the need to manage the credit risks faced by exchange members. Queueing theory is used to represent the opportunity loss suffered by brokers engaging in multiple activities: order-flow origination and its intermediation. The role of market-making locals is depicted as enabling specialization. Brokers focus on originating order flow and locals on fulfilling intermediation needs. The capacity to specialize is constrained by the availability of creditworthy members acting as locals. This results in a tension between pursuit of immediacy and managing inter-member credit exposure. Two exchange rules, tick size and price limits, are evaluated for their effects in resolving this tension. This research benefits from the comments of Ray DeGennaro, Mark Flannery, Steve Kane, Tom Lindley, Jay Marchand, Pat Parkinson, Asani Sarkar, Lester Telser, Rich Tsuhara and participants of the Brookings-Wharton Financial Services Conference (January, 2002). Errors remaining in this draft are mine. The views of the paper do not reflect the official positions of the Federal Reserve.Stock exchanges ; Stock - Prices

The Immediacy Implications of Exchange Orgzanization

The paper introduces a connection between the needs of exchanges to respond to the immediacy needs of their clientele and the need to manage the credit risks faced by exchange members. Queueing theory is used to represent the opportunity loss suffered by brokers engaging in multiple activities: order-flow origination and its intermediation. The role of market-making locals is depicted as enabling specialization. Brokers focus on originating order flow and locals on fulfilling intermediation needs. The capacity to specialize is constrained by the availability of creditworthy members acting as locals. This results in a tension between pursuit of immediacy and managing inter-member credit exposure. Two exchange rules, tick size and price limits, are evaluated for their effects in resolving this tension.

Credit derivatives: just-in-time provisioning for loan losses

Credit derivative contracts offer a new route for managing counterparty exposures. This article discusses two formats of these contracts. The contracts have potential for providing portfolio managers with a cost effective, just-in-time source of liquidity.Credit ; Derivative securities ; Contracts ; Risk

A modest proposal: securitizing multinational LDC debt

Debt ; Asset-backed financing ; International Monetary Fund

Credit derivatives: the latest new thing

Credit ; Derivative securities

Circuit breakers

Stock market ; Futures

Determining margin for futures contracts: the role of private interests and the relevance of excess volatility

Margins (Security trading) ; Futures ; Risk

Contracting innovations and the evolution of clearing and settlement methods at futures exchanges

Defining futures contracts as substitutes for associated cash transactions enables a discussion of the evolution of controls over contract nonperformance risk. These controls are incorporated into exchange methods for clearing contracts. Three clearing methods are discussed: direct, ringing and complete. The incidence and operation of each are described. Direct-clearing systems feature bilateral contracts with terms specified by the counterparties to the contract. Exchanges relying on direct clearing system chiefly serve as mediators in trade disputes. Ringing is shown to facilitate contract offset by increasing the number of potential counterparties. Ringing settlements reduce counterparty credit risk by reducing the accumulation of dependencies as contracts are offset. Ringing settlements also lower the cost of maintaining open contract positions, chiefly by lowering the amount or required margin deposits. Exchanges employing ringing methods generally adopted a clearinghouse to handle payments. Complete clearing interposes the clearinghouse as counterparty to every contract. This measure ensures that contracts are fungible with respect to both the underlying commodity and counterparty risk.Contracts ; Futures ; Clearinghouses (Banking)

Do markets react to regulatory information?

Stock market ; Bonds ; Stocks

Stock margins and the condition probability of price reversals

Does the cost of trading affect stock prices? Yes, according to the evidence in this article. The authors find that high costs seem to reduce the frequency of price reversals.Stocks ; Stock - Prices