By Richard Bookstaber
Inside markets, innovation, and risk
Why do markets hold crashing and why are monetary crises more than ever earlier than? because the chance supervisor to a couple of the best organisations on Wall Street–from Morgan Stanley to Salomon and Citigroup–and a member of a few of the world’s biggest hedge money, from Moore Capital to Ziff Brothers and FrontPoint companions, Rick Bookstaber has obvious the ghost contained in the computer and vividly indicates us an international that's even riskier than we predict. The very issues performed to make markets more secure, have, in reality, created an international that's way more harmful. From the 1987 crash to Citigroup final the Salomon Arb unit, from remarkable losses at UBS to the loss of life of long term Capital administration, Bookstaber supplies readers a entrance row seat to the administration judgements made by way of essentially the most robust monetary figures on this planet that resulted in disaster, and describes the effect of his personal actions on markets and industry crashes. a lot of the innovation of the final 30 years has wreaked havoc at the markets and price trillions of bucks. A Demon of Our personal Design tells the tale of man’s try to deal with industry hazard and what it has wrought. within the strategy of displaying what we've got performed, Bookstaber shines a gentle on what the longer term holds for an international the place capital and gear have moved from Wall highway associations to elite and hugely leveraged hedge money.
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Additional resources for A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
There are many more corporate bonds than Treasury bonds, and most corporate bonds only traded by appointment. This led, true to the caricature in Tom Wolfe’s novel Bonfire of the Vanities, to bond salesmen whose principal expertise was knowing who owned what bonds (the principal value of having done the bond underwriting) and passing these bonds from one hand to the other for a spread. Sell $100 million of bonds at a quarter-point spread, and the firm would pocket $250,000 for making a few phone calls.
With so much money to be made and with the clock ticking until others piled on, new products were brought to the market before they were road tested. Basic questions about the security’s price behavior or how risk could be managed took a backseat. Those who were late to the party, the ones who would be described as “competitive forces” pushing prices down to try to entice business, entered the fray not to seize profits but to stem the cost of being left behind. For the latecomers it was all downside; if they didn’t play the new game they would be seen as unresponsive and lose their clients to other firms that could help the clients try on fashionable new securities.
When the S&P futures contract sells for less than the price of the basket of the individual stocks in the S&P, then the cash-futures arbitrageur buys the S&P and sends in orders to sell the individual stocks. If the price difference is greater than the transaction costs of doing this trade, then they make an almost certain profit. This trade effectively transfers the stock market activities of the futures pit to the individual stocks on the NYSE. That’s where things broke down in 1987, and broke down for a simple reason: Stocks are not as liquid as futures.