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Interesting article, I also read about Taleb Nassim's big options play on that day, and Barclay's subsequent hedging of its exposure. This comment from Gensler is typical of the madness today. "Gensler said data shows that the trades appeared to be a bona fide hedging strategy". Really! If I do a billion dollar OTC options trade where the market can't see it and then I just come in start selling Gamma like crazy, is that hedging or is the the hedging the prime intention in the first place.
I worked as an interbank exotic options broker at Cantor and ICAP for about a year and I learned a thing or two about options strategies. I was on a desk with 20 other brokers, a lot of adrenaline and noise, matching up huge trades across the banks. They call it risk sharing, of course the only real risk for them is one of the others going bust. I was on the desk in the spring of '08 when some of the banks stopped allowing Lehman as a counterparty, interestingly enough.
So here's how it works. Bank A does a few hundred million, or billion, in various flies and spread structures over a few days with bank b. A hold the apple paper, B holds the orange paper. In grotesque amounts of course that neither really has but it's just paper. So much in fact, that A can now go into the futures market and do ridiculous volumes backed by this paper. We call it hedging. They call it risk sharing. The general public and media calls it madness.
It's impossible to regulate and impossible to put back in the genie bottle. From a societal standpoint I think the best thing to do would be to force it all to the exchanges and add new exchange rules that allow for some form of 'darker trading'. At the same time, I like the madness as an intraday trader because I know that the market is just a game. You'll never know which way the ball is going to roll. As an intraday trader that's great because you don't care about why it's going in any particular fashion, you just want it to be moving. And then it does create a lot of liquidity and capital expansion, but who benefits, and then it's just too bad about the busts. Anyhow, I don't think anything is going to change because it has just become so complicated but it would be nice to see what these giant players in options are doing, out in the light of day. And I feel for those people who got burned by the actions of said speculators. It seems a bit unfair really.
Can't resist boasting about my team, Newcastle Knights', victoyr over the Sydney Roosters in the Australian NRL (National Rugby League) yesterday in Sydney. There's a awesome try by the Knights after a kick-off!