Industry Open-Sources Model For Infamous CDS 161
GlobalEcho writes "Credit default swaps (CDS) are infamous for bringing down AIG and requiring a bailout of hundreds of billions of dollars. Because the market for these was so murky, the US government has insisted that Wall Street create a clearinghouse for these contracts. In a fresh twist, part of the deal is that the models used to price CDS have been standardized, and that the pricing code was made open source, under a somewhat BSD-like license. The source code (originally written by JPMorgan) provides the basic pricing routines, plus an Excel interface. To my knowledge this is the first significant migration of an investment bank product platform from its usual super-secret proprietary home to the rest of the world."
source code links (Score:3, Informative)
Not sure if a direct link will work:
http://www.markit.com/information/cds-model/download/contentParagraphs/00/document/isda_cds_model_c_v1.7.zip [markit.com]
http://www.markit.com/information/cds-model/download/contentParagraphs/01/document/cds.xll [markit.com] (excel)
http://www.cdsmodel.com/ [cdsmodel.com]
But... but... (Score:1, Offtopic)
Microsoft has said that Open Source is communist and Anti-American! How can the business community survive, now that their broken algorithms have been published? We're doooooooomed!
Re:But... but... (Score:5, Interesting)
Microsoft has said that Open Source is communist and Anti-American! How can the business community survive, now that their broken algorithms have been published?
Maybe you haven't been paying attention. For the past four months, all the CEOs of all the banks have been singing the praises of communism. They were so convincing, in fact, that the government handed them $350 billion with no strings attached (which they promptly spent on themselves, bonuses for their lackeys, and on buying distressed companies).
The banks aren't any more anti-communism than Microsoft is. IE: They oppose it when it benefits others or non-executives, and support it when it keeps them and the rest of the American Aristocracy in beach houses and private jets.
And in that, they are no different than anyone else, except the extreme rare few who strive for objectivity and reason. Extremely endangered are they, though - I believe there are three hundred sixty four known examples of such people in the wild, and but few of them have formed breeding pairs.
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funny but sad but true. I think we have all figured out now it's just going to be more of the same.
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For the past four months, all the CEOs of all the banks have been singing the praises of communism.
Actually, no: the parasites running American banks have been singing the praises of National Socialism, which is a political and economic doctrine that states certain industries or companies are so important to the wellbeing of the Reich... err... Homeland that they must not be allowed to fail even though they remain in private hands.
Most of the American political class of both parties are also in favour of
Re:But... but... (Score:5, Insightful)
No, we got a much worse deal than communism.
Had this been a communist maneuver, "we the people" would now own these companies -- and that's something bank CEOs wouldn't stand for for one second. Instead, we got nothing in return for our money.
No, bank CEOs will never support communism. A true communist revolution would strip them of their wealth and their companies
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You are mistaken. The government received senior bonds in exchange for the money. Today, Citigroup asked the government to convert those bonds to equity, and the government now owns 36% of Citigroup (under the bond structure, Citi had to pay the government interest; apparently, that was a problem, so they converted them to equity; hopefully they got a reasonable price).
It may end up that the government investment disappears, or it may turn a profit (I would guess that the government will recoup a significan
Sweden did this surprisingly well (Score:2)
Sweden had a smaller version of a banking crisis a few years back (90s, I think, or maybe early 00s.) They gave the banks more capital by having them issue stock which the government bought; it diluted the original shareholders' stock, and the government could have theoretically run the bank operations as a big stockholder, but once the banks recovered the government made a profit on the deal so the taxpayers actually got something back. I think it was around the timeframe that I was bumming around Scandi
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Had this been a communist maneuver, "we the people" would now own these companies
Actual reality: the government would now own those companies. They would run them inefficiently, and only members of the ruling party could obtain its products without restriction - others would have to wait in kilometer-long lines and have government-issued coupons. The prices for the coupons on the black market would be several times the shelf price for the item. And even if you had coupons and money you would have to find a store which actually has the items, which would be impossible.
This would only str
Honest question (Score:2)
Why is it any more appropriate to define communism by what Soviet bloc countries did than by what China does?
The "buying distressed companies" part ... (Score:2)
It's not clear that the "buying distressed companies" part is being done with bailout money.
As part of the same legislation, the government changed the tax rules. Now if a successful bank buys a failing bank it can use all of the losses of the failing bank to offset its profits for computing taxes. (IMHO that always should have been the case and the previous regulations to th
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So there was no issue with trying to evaluate the quality of the bank's assets (especially the mortgages).
I would disagree, a bank has a lot of assets but also a lot of libabilities. If the banks assets don't outweigh thier libabilities then buying them would be a very stupid move.
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Good point.
OK, modification: If the bank's actual assets (including its customer base and the removal of its competition against the purchaser), plus the tax benefit of their current losses offsetting the buying bank's gains, is greater than the purchase cost plus the cost of the merger and turning around the purchased bank's operating procedures
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Not every CEO has been whining to the Feds: [bizjournals.com]
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Several banks actively didn't want tarp money, can't find the link but BofA at the time also didn't want any part of it.
The problem is that if people saw that the government was handing money out to some people but not others, they could either reasonably conclude that the funded banks were near bankruptcy, which wasn't necessarily true, or that the unfunded banks were near bankruptcy, and that the government didn't want to sink money into them.
If they lay the money into all the large ones at once, the b
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They didn't give them the money, they loaned them the money at 5% interest, escalating to 9% after three years, with the government having priority over equity holders in the event of a default.
And, in fact, they haven't spent that money at all; that's what Congress was flaming about in the hearing the other day. (Alutthough buying distressed companies would fulfull the purpose, assuming the buyer were strong enough...)
But maybe you haven't been paying attention, or are you just not letting a few facts kee
government bailout != communism (Score:4, Informative)
Here's the basic idea. Under Capitalism, business owners make a profit by paying their workers less than their labor is worth (so all profit is exploitation), and the business owners are able to do this because racism &c. divides the workers. Eventually, the exploitation of workers gets so bad that they develop a class consciousness on the basis of their economic status that trumps racial &c. divides, and they (forcefully) take power from the business owners. The final stage of Marxist communism is really a form of anarchy, where the means of production are owned by workers in a distributed fashion.
Agree with Communism or not, at least keep in mind that any top-down government aid paid for by workers to huge corporations is basically the opposite of Communism.
Communism != communism either (Score:4, Insightful)
Hey, don't you remember that "spam" has replaced "libertarians vs. socialists" as the default Internet discussion topic for the last decade? :-)
Marxism-Leninism doesn't actually work that way - the workers may get oppressed under capitalism, but they don't get around to developing the class consciousness that they're supposed to, so the elitist vanguard has to lead them in a revolution and stomp out the bourgeois classes. Since Marxism fails to recognize the value of creativity and risk-taking that entrepreneurs provide, that work doesn't get done after the revolution, so the economy recovers very slowly if at all from the damage done in the revolution, with idealist dogmatism as a poor replacement for the information provided by prices in a market, and the elites end up becoming the new class of bosses, not even the same as the old bosses, and the final stage of Marxist-Leninist communism is a chaotic transition to something like less competent capitalism.
Back in the early 90s, I was at economic conferences in Eastern Europe, and one of the fundamental issues that those societies were trying to solve was how to give the means of production to the workers before the ex-Communist bosses stole all the good stuff; in some cases the former state companies gave stock to the workers, but that didn't happen all that often, and usually only on businesses that weren't worth stealing.
On the other hand, the current top-down government aid paid to huge corporations is not only not either theoretical or real Communism, it's a great reminder that Ayn Rand's morally pure capitalists were more of a fictional device than a description of real capitalism. I don't think I agree with your assertion that the aid is getting paid for by "workers" - after all, we're taxing the "rich", and have been taxing businesses all along, and the bailout money's mostly getting borrowed, either from China or from Westerners who still have assets to invest in T-bills. Some of it will get paid back by your kids, and some of it will get defaulted on somehow, either by finding a way to restart inflation (which is a lot tougher in today's global economy than it was when Reagan did it) or by some new scam.
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Under communism, man exploits man. Under capitalism it's the other way round.
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But Marx was wrong. (Score:2)
What workers labour is worth is determined by the markets, not by a conspiracy of business owners.
Of course in a political system where workers have no rights the employers can actually act like cartels and impose a general level of salaries, but even then what helps them is that skilled people can become a dime a dozen (something IT workers should have learned already, but that they blissfully forget as soon as India and outsourcing hit the front page of this veritable website).
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The banks aren't any more anti-communism than Microsoft is. IE: They oppose it when it benefits others or non-executives, and support it when it keeps them and the rest of the American Aristocracy in beach houses and private jets.
[...]
I work in Finance since 1988, and I am at least familiar with CDS and other things, so here's my 2c.
CDS, and other exotic derivatives, have practically nothing to do with banking; moreover, Banking is a "Communist" activity.
let's first define "proper banking": your employer credits your pay to your bank account; your bank keeps a ledger of how much money you have available on your account, but unless you invest it yourself, by buying a government bond or something similar, that money is just sitting id
Microsoft-style version of the source code (Score:2)
Microsoft's real problem with Open Source is the language it's written in; if you translate it into a language they like better, they're not as concerned with the actual license. So here's a MS-friendly version of the code:
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Yes, but after hundreds of billions of dollars in development expenses, this is the most expensive open source software in the world.
The world financial meltdown must count as the world's most expensive software bug ever. If this software had been widely accessible and better understood sooner, the macro-economic consequences of the activities relating to this software might have been better understood much sooner. The crisis might have
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Considering that most of MS-DOS was written in 8086 assembler, open sourcing it was a rather moot point. That's one reason why clones like DR-DOS were able to exist.
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DONKEY.BAS was open source from the beginning.
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That was a fun game, I'd completely forgotten about that. Thanks for bringing back some good memories. I prefered Gorillas though, there was just something very satisfying about throwing exploding bananas around.
Open source bankruptcy (Score:1)
Great ! Now we can all go bankrupt the open source way ! Isn't open source grand ?
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Use the RSS feed. ;)
Excel interface!?!? (Score:5, Funny)
Turns out BSD wasn't dying (Score:5, Funny)
My 401k was.
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And is now a 201(k).
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And is now a 201(k).
For some people, it's turned into a -273.15(c).
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Heard on Wall Street:
I lost half my money, but I still have my wife.
Re:Turns out BSD wasn't dying (Score:5, Funny)
Heard on Wall Street:
I lost half my money, but I still have my wife.
Scratch that...quarter of my money.
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your first half had been screwed by the bankers, the second half will be screwed by the bailout.
Reason: Security (Score:4, Insightful)
Maybe financial institutions are catching on to the idea that open source provides a far greater degree of security, accountability, and maintainability than closed source? Just a thought. Because part of the reason why this situation arose is because of black-box money transfers that didn't have any oversight, and were largely automated. This way, financial institutions can get a far better picture of risk exposure -- and know that everyone else is doing the transactions in the same fashion. In short, everybody knows the rules of the game and who the teams are, unlike before where the rules weren't known until a referee called a foul.
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It's not security. The models are b0rken. Badly. There's no good reason to release'em to the world other than to brag about being more open now than before (see, we're so open about our business now, we learned our lesson, please give us your money). Maybe even write off the model [well, labor expense] for tax purposes (donation to the world of open source!).
Internally, other models are being created that are less broken---those won't be made public as the whole point of modeling such things is to get an ad
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to get an advantage over your competition (you can't let the world know how much you think stuff is worth).
So banking is basically a big game of poker?
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So banking is basically a big game of poker?
indeed.
Re:Reason: Security (Score:5, Insightful)
Yeah, because the main problem with Credit Default Swaps is that the pricing code used internally in banks wasn't distributed under an open source license, not (among other things) that the distribution of risk of default away from those making lending decisions encouraged those making the lending decisions to commit and encourage others to commit frauds which made the inputs into any pricing model unreliable.
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Can you point me to some sources on people who have been arrested for fraud related to CDS?
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The fraud that it encourages (and encourages laxness in detecting on the part of bank officers that aren't actively engaged in fraud themselves) isn't, directly, in the sale of the CDS's themselves, its in the representation (or verification) of income and other qualifications for individual loans. I'm not going to go dig up all the news stories related to problems in that regard that have surfaced over the last coupl
Pennies (Score:3, Funny)
Let's change it. I've got this idea regarding fractions of a penny...
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Yeah, but if caught you could end up going to federal POUND ME IN THE ASS prison...with Bernie Madoff as your bunk mate.
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Well that's what you get for trying to smuggle British currency.
not open source (Score:2)
as traditionally understood: everyone owns it
its more like open source, as in the government, our representatives, literally own the source
along with every other financial institution and all of their intellectual property since they all went belly up
(the term "intellectual" property as applied to the product of financial analysts being used very loosely)
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as traditionally understood: everyone owns it
That's only for government-owned code. This code was originally written by JP Morgan and ownership was transferred at the end of last month to International Swaps and Derivatives Association, Inc., who open-sourced it, according to the first paragaph in TFA.
Grumble - "work" email address only (Score:3, Informative)
Tried to download the source from www.cdsmodel.com (where the TFA) points you.
Wants an email address
"I Accept
Please keep me Informed about changes to the Standard Model:
Email Address:
"
If you choose not to be informed it asks for an address anyway.
If you add an email address - I used a gmail address - it asks for a work address. emailsucks@jpmorganblows.com now has a copy of the source.
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Or maybe:
pat.robertson@ob.org
May make more sense after this:
http://en.wikipedia.org/wiki/Operation_Blessing#Criticism [wikipedia.org]
So I was wondering if Pat Roberson was planning on using child labor to mine emeralds in Myanmar, or force children to mine asbestos in Zimbabwe? Though he may want to hire Blackwater "contractors" to protect his laborers, or any available local thugs. The deciding factor in each decision would be how to inflict the most amount of violence and misery at one time.
Embrace and extinguish. (Score:1)
I think they got it backwards.
Something is weird with that domain (Score:1)
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Check the source code in HTML
second url is listed as "http://www.cdsmodel.com./"
remove the period/dot after "com"
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Check the source code in HTML
second url is listed as "http://www.cdsmodel.com./"
remove the period/dot after "com"
That's the entire point, the way DNS works all names actually end with a '.'. But because it's always there, it can be implicit. What probably happened is that somebody screwed up their domain-based virtual hosting somehow due to not understanding this.
Oh noes, not Excel! (Score:2)
Re:Oh noes, not Excel! (Score:4, Informative)
Everyone, without exception, uses excel in the banking world. A lot of backend stuff runs on OSS though. And the source code to the calculator is in C, and includes a Linux makefile.
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Open does not make them any better (Score:3, Interesting)
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Yes but it kind of upset me that it did not explain anything about CDSs except that they were sold on the securities created from the sub-prime mortgages.
What I find almost as absurd as CDSs themselves is the fact that the mainstream public and news is not really talking about them. Try searching CNN or FOX and you get almost nothing. Only 60 Minutes, NPR and some other more financial focused new outlets have made it known that the mortgage crisis is only one of my fuses of this bigger bomb. I do not even h
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<tinfoilhat>Why do you think NPR is ranted against so much, given the "L"iberal name? It's not like they're trying to demean the source.</tinfoilhat>
I imagine since CNN and fox and every other mainstream media tries to appeal to the average masses, repeating the same news story ad nauseum, that any coherent, in depth reporting that isn't a sound bite is left to a 60 minutes, a NPR, or the few other news organizations that care to actually get it right. Who cares about a financial meltdown when
Re:Open does not make them any better (Score:4, Insightful)
CDSs, priced with open software or not, are the ticking time bomb of the world economy. Nothing better than bookie betting they have created an inflated payout of $50 trillion dollars worldwide that only takes the fall of a few big banks to start.
The lack of regulation surrounding CDS's is just nuts. As explained in that excellent TAL episode you linked to - the situation amounts to people gambling on the banks to fail, with "insurance policies" (what a CDS basically is) having been issued to the extent they amount to 10x the value of the assets being "insured". It's as if 9 other people bought fire insurance on your home, basically hoping for it to burn down.
The whole situation is just absurd - and it's world-wide to boot.
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Exactly.
One thing that never seems to get mentioned is, who is on the other side of t
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You seem to complain about the media's and politicians' problem with speculators, yet you forget that the vast majority of CDS contracts out in the wild are written for purely speculation purposes.
If an entity has invested X dollars into company Y, yes there should be some financial instrument available to this entity to protect its investment. I agree with you there. However, if entity X has 0 dollars invested in company Y, this entity shouldn't have the right to buy a financial instrument targeting compan
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You seem to complain about the media's and politicians' problem with speculators, yet you forget that the vast majority of CDS contracts out in the wild are written for purely speculation purposes.
If an entity has invested X dollars into company Y, yes there should be some financial instrument available to this entity to protect its investment. I agree with you there. However, if entity X has 0 dollars invested in company Y, this entity shouldn't have the right to buy a financial instrument targeting company Y and protecting X from Y's default. That is gambling, not investing.
Actually, what you describe is a fundamental part of investing; and not a new concept. If I think a company is going to do better than expected over some period of time I can either buy their stock or buy a call option. If I buy the stock I assume all the risk of ownership - it may fall to zero and I lose my entire investment. If I buy an option I get any upside but have no downside risk beyond the initial option price; plus I get a greater return since the option allows me to control more stock than a s
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But would they insure the whole house or just their materials and cost of the loss of work? Would they ensure a house they had no association with? Also when you get actual insurance the insurance company has to by law have at least a certain amount of backing to be able to make payout. The idea of insurance is good for explaining CDSs but the details make them fundamentally different than insurance.
The problem with CDSs is that it does not take a wholesale breakdown. Just the fall of one large bank can tri
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I don't see how that could possibily go wrong! Why it's almost as sound an idea as pitching an off-Broadway musical to multiple backers, selling over 400% total shares in the profits, and then pocketing the cash when the musical fails! All that is need is a subject matter practically everyone detests, therefore no one will pay money to see it! Hmm, perhaps something that focused on the early adult life of a hated facist dictator... Yes that would be perfect!
Wow, now that you put it that way - it makes perfect sense! Sign me up!!
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Also PBS' Frontline Inside the Meltdown [pbs.org] talks about the causes as well. A short summary: Everyone was speculating on housing. In the past, a bank were careful about mortgages. They had to very careful because they were responsible if the home owner defaulted. They may get the value back if they resold the home after foreclosure; but also they may not.
Then the house speculation of the late 90s and early 2000s happened. People were no longer holding onto homes until the mortgage was paid off. As hom
This is the litte formula (Score:2)
That got us in this mess. Using math for social problems might not always be the best way to do things. It's just bookmaking, that's all.
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=3 [wired.com]
Re:This is the litte formula (Score:4, Interesting)
Well, it's not the model that tanked AIG, it's that the contracts allowed AIG to write insurance with no capital reserves, because they were rated AAA. Of course, they're AAA because the have regular income from their insurance businesses, and access to capital markets, and were pretty damn big. This is stupid, because they went on to write as many contracts as big AAA rated company is allowed to.
So many problems we have come down to credit ratings manipulation, that I'm ready to demand that they be shut down, and never relied upon. A credit rating is ephemeral and subject to violation of trusted 3rd parties; cash downpayments aren't.
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True, back in the old days, 30% got you the loan. It didn't have to all be in cash just some stuff that a solid value can be paced one on (land) plus some cash that you have. Something that you can get a value on works. Cash is good. It discourages house flipping and things that no formula should be relied upon to judge. The banks that didn't do this (local banks around here) are doing OK.
AND.... yes it should be shut down period. Financial markets as such are more complicated than predicting weather models
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I agree with you 100% but that's how the ones in charge want it to work, unfortunately unlike real bookmakers, they don't have access to all of the variables involved and never will unless we change the rules of the game.
--If Wall Street were run LIKE a casino, they WOULD NOT
lose money.--
Isn't that too bad that the Mafia could probably do a better job than the ones in charge of the decision making as of now. Investing money is gambling that's not supposed to favor the house but the investor. The odds of win
Not a big deal (Score:5, Informative)
I work in this area, and this isn't really that big of a deal, regardless of the spin they put in the announcement.
This is about publishing a reference implementation of an already widely published model so that when party A does a particular calculation, related to a settlement amount for a particular trade, and party B does the same calculation, the values match.
Qualitatively, and to a large extent quantitatively, everybody on the street has been using the same model all along. The idea of publishing a reference implementation is meant to minimize conflicts in settling trades.
The accuracy of the valuation model here is not at the heart of any of the problems that AIG -- or any other firm, for that matter -- have experienced. That's more aligned with a simple lack of oversight on exposure.
QuantLib (Score:2, Informative)
Comment removed (Score:3, Interesting)
More common implementation source code (Score:2)
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That GOTO is a good way of error handling. It lets you put all the error handling and cleanups in one place, without having to repeat them all the time (yes, this is one of the primary use cases for goto statements).
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You left out a bit at the end - the correct implementation is:
if (status != SUCCESS) {
JpmcdsErrMsgFailure(routine);
bailedOut=true;
status=SUCCESS;
setRunning(true);
}
Law Compilers (Score:2)
CDS pricing is now a matter of Federal law, and will surely be evaluated with this software as the legal rules for enforcing pricing.
I hope this event marks a watershed in our progress towards making all truly formulaic and deterministic laws, or those portions of any laws, validated compilable software. The laws should specify the software's policies, against which claims of bugs should be argued. But the actual execution of the software should let anyone who wants anticipate how a court would rule that pa
If they had only done that sooner (Score:3, Interesting)
This is a really good idea. Not because this code is any good. In fact it is quite obvious that whatever code Wall Street used to price CDS did not quite work, as AIG (who I am sure used a Wall Street bank for advice) was not able to correctly price these. So this is a classic situation of someone opensourcing code that is known to be useless, in order to get some good will out of it.
But if the code is open sourced, at least people will be able to analyze it and know how worthless it is. So when somebody wants to buy shares in a bank or an insurance company, he/she can look at the code used to price that company's assets and liablities and will know how much to trust the company's books.
There was a story a couple of months ago that some people examined the computer code that rating agencies used to rate mortgage backed securities. They asked the rating agency to plug in the code a slight decrease in home prices to see what prediction the code makes. The rating agency said that that would be impossible because the code was written under the assumption that housing prices never fall!!!
Unsurprisingly all major rating agencies rated most mortgage backed securities AAA right before the market crashed, and thus fucked over shitloads of investors that were stupid enough to believe them.
Now if an investor had access to the code, they might know that the rating agencies are full of shit and not trust their ratings.
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As much as I praise this move, since I believe that any sort of standardization is good, the problems were not with the code. Also, it's not like you'll be able to do any of the things you are claiming. Even the best models are entirely dependent on their inputs and interpretation of the input/resulting values. You don't just run this code as is and get out a price; you'd have to replicate all the assumptions that were being made. Under the right assumptions, the output of the model might even be pretty goo
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This is a really good idea. Not because this code is any good. In fact it is quite obvious that whatever code Wall Street used to price CDS did not quite work, as AIG (who I am sure used a Wall Street bank for advice) was not able to correctly price these. So this is a classic situation of someone opensourcing code that is known to be useless, in order to get some good will out of it.
But if the code is open sourced, at least people will be able to analyze it and know how worthless it is. So when somebody wants to buy shares in a bank or an insurance company, he/she can look at the code used to price that company's assets and liablities and will know how much to trust the company's books.
There was a story a couple of months ago that some people examined the computer code that rating agencies used to rate mortgage backed securities. They asked the rating agency to plug in the code a slight decrease in home prices to see what prediction the code makes. The rating agency said that that would be impossible because the code was written under the assumption that housing prices never fall!!!
Unsurprisingly all major rating agencies rated most mortgage backed securities AAA right before the market crashed, and thus fucked over shitloads of investors that were stupid enough to believe them.
Now if an investor had access to the code, they might know that the rating agencies are full of shit and not trust their ratings.
...of course, simple commons sense told that, irrespective of the quality of the software, pricing complex derivatives, often lasting years and years, or rating bonds or issuers,implied a knowledge of the future that defied its end; if I knew with a good enough approximation the future events, why should I sell such knowledge for a pittance? and remember "pittance " here is a huge amount of money anyway.
perversely enough, seeing an hardcoded result in the source would warm my heart, because it would imply
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I suspect it isn't a problem with the computer code. It was a problem with the values fed into the program.
I sometimes find myself having to value derivatives at work. I know what the formulae for working out the values are, but finding the right values to use in it is very difficult, and often very subjective.
What's the big deal? (Score:4, Informative)
Marketcetera Open Source trading platform (Score:2)
Marketcetera [marketcetera.com] recently saw a 1.0 release, and is currently deployed in over 20 financial institute production deployments according to their confluence page. It uses the open and standard FIX financial data protocol, and personally its one of the coolest things I have ever seen. I would love to get a team of coders and quant. analysts together, hook Marketcetera up to a FIX compatible provider like Penson [penson.com] or Lime Brokerage [limebrokerage.com] (yes, same people as Limewire), and start a blackbox fund. You could rival any major f
As an ex-Retail Banker... (Score:2)
Wall Street technology is not that closed as you think it is.
It is the ultimate in competition.
Any new idea lasts a few days (like Portfolio Insurance) before a joker err.. banker leaves his organisation to join another next door at a substantial pay raise.
He takes the ideas with him and the new company builds the new system. Simple.
No new investment or techno innovation idea stays with same owner for longer than a few months max.
Initially draconian contracts were written in 1970s but they soon realized tha
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Well, there's the lap dances [rockymountainnews.com], rock concerts [tmz.com], and golf tournaments [golfweek.com], but really, if no one cares about the pitfalls of 30:1 leverage, who cares about these puny details.
FWIW Rocky Mountain News now folded (Score:2)
Your lap dances link goes to Rocky Mountain News. Did you know yesterday was their last day in print, a couple months short of 150 years in print? (FWIW the link still works, for now.) Back in the 80s I went to school in the area and remember them as the state edition most subscribed. I hadn't thought of them in years until yesterday, but it's still sad to know they are gone.
The name and news archives remain "for sale". The paper didn't convert fast enough to electronic, I suppose. They had an electro
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You shouldn't need super-secret proprietary Ultra Code in order to price an issue, it just requires a market and the means to discover a price.
Exactly. The only reason anyone needs a model like this is because of the illiquidity and opacity of the CDS market.
Besides, I don't know why anyone would want to actually use this model to price anything. It hasn't proved very accurate.
well, the market also needs information (and time) (Score:3, Insightful)
What is a potential purchaser going to want to know before deciding how much to offer for a security? Well, something about its characteristics. If it's a derivative of other securities, they might want to know how its value relates to the values of underlying securities.
You first need to know the qualitative information of course: how does a change in the underlying securities result in a change in its price? What additional risk components (such as counterparty risk) does it have? Etc. Then the potential
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The proprietary protocols are for automated trading; you need an edge against others in determining value if you are trading something with volatility or dynamic valuation so you are able to get in and out at optimal prices and times. The 100-day EMA might be established by the "market", but the optimal price for a transaction is another story.
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You shouldn't need super-secret proprietary Ultra Code in order to price an issue, it just requires a market and the means to discover a price. Of course, that doesn't help if you're selling the cash-stream leg of the derivative to yourself, so you need a very sophisticated process to discover how much a 3rd person would pay if you weren't self-dealing, which you might not be doing as much of if your issue was an actual item of intrinsic value, and not little more than a side bet you invented to mollify CDO investors...
Am I getting anything wrong here?
I'd say probably, because "market and the mean to discover a price" means to me the price at which I would be able to resell the derivative back to the originator or some other entity, not the price someone would pay for buying it, which is the usual answer. :D
Moreover, and I am getting finacially geeky here, if you buy a credit default swap from an entity you really should buy two of them
here's why:
let's say that I own 10 mn USD of a 5 year maturity bond issued by General Electric, which for some reas
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And a market would be very nice, but one cannot simply rely on the market to find prices, otherwise there will be nothing pressuring the prices towards their correct values.
If the "correct" price of an asset isn't what the buyer and seller agree upon, then what is it?
Hindsight. (Score:2)
The 'correct' price can only be determined in hindsight.
The price a buyer and seller agree upon is the market price. Markets aren't that simple though, other players trading at the same time will settle at different prices (market spread).
Only in hindsight do you have a chance of determining what the 'correct' price was. It's not always going to be the average market price.
Markets are are best pricing mechanism where there is liquidity and transparency. Absent that it's a crap shoot.
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If both the buyer and the seller partners in an elaborate fraud where the asset is sliced, diced, repackaged and the ultimately sold for 10 times the orignial value, I would say the final price is incorrect!
If both the buyer and the seller are parties to the "fraud", then who exactly are they defrauding?
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In these transactions, the buyer and seller are both agents who are making transactions in fiduciary trust to the people they're managing the money for, e.g. The Investors.
Yes, that's certainly fraud. But, such fraud can only exist in the absence of a transparent and liquid market. The OP was arguing against the use of markets to determine prices, and for the use of complex models to determine the "correct" price.
My point was that determining a price by the use of models, instead of the actions of buyers and sellers on an open market, is what allowed this massive mis-pricing of assets to happen.
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#include // This function converts a bad day to a good one (if it's in list).
I believe I have found their list :
std::string goodDayList = {"hookers", "cocaine", "bailout"};