OTC and Exchanges: Convergence Deferred; Five Years Ago, the Promise of Commoditization and Real-Time Processing Created an Expectation of a Renaissance in Listed Product Development. Alas, Only a Handful of Products Were Developed, and They Were Underwhelming. but the Expected Convergence of OTC and Exchange Markets Is Gearing Up Now

Zwick, Steve, Futures (Cedar Falls, IA)

Richard Olsen and his partner Michael Stumm built the Oanda trading platform in part to show it was doable, and in part because they truly seem to believe that if you get more people participating in open, transparent and liquid markets, you'll end up with the kind of fair and stable financial system that markets are supposed to deliver.

Contrast that with the over-the-counter (OTC) world, where a few well-educated, but not particularly diverse, minds are determining the prices on which trillions of dollars worth of global instruments are based.

A cynic would blame the top-tier banks that run everything and keep the markets closed and clunky to bloat the bid-offer spreads that generate their profits.

Someone less jaded might argue that closedness and clunkiness are necessary traits of the OTC beast, which is no beast at all, but rather a sort of financial market Miles Davis or Kurt Cobain--a cantankerous and temperamental genius, whose idiosyncrasies we willfully tolerate to enjoy the benefits of their work.

Olsen says their value has been greatly exaggerated.

"If you have one group of people who all read the same newspapers and all go to the same restaurants agreeing on a price," he says, "you get a price that can go to completely unreasonable levels, and eventually the bubble will burst, and that's what's happening now."

The price he's referring to, of course, is that of credit default swaps (CDS) and other credit-default instruments, but the analysis can be applied to all markets dominated by OTC transactions.

WISE CROWDS?

His point touches on several fascinating debates, chief among them being whether broader participation in the pricing of such instruments would have prevented, or at least minimized, the current credit debacle.

"I don't think …

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Publication information: Article title: OTC and Exchanges: Convergence Deferred; Five Years Ago, the Promise of Commoditization and Real-Time Processing Created an Expectation of a Renaissance in Listed Product Development. Alas, Only a Handful of Products Were Developed, and They Were Underwhelming. but the Expected Convergence of OTC and Exchange Markets Is Gearing Up Now. Contributors: Zwick, Steve - Author. Magazine title: Futures (Cedar Falls, IA). Volume: 36. Issue: 13 Publication date: November 2007. Page number: 70+. © 2009 Summit Business Media. COPYRIGHT 2007 Gale Group.

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