Tuesday, October 20, 2009

EC insists banks pay larger bonuses

On page 2 of City AM this morning is a story entitled 'EC gets tough on derivatives'. Apparently the European Commission plans to drive more derivatives trading onto exchanges and hence "under the gaze of regulators".

I think this is great. New categories of exchange-traded instruments means loads more front-office IT work doing exchange connectivity, more autotrading, and - since it's not possible to get everything 100% perfect at 8am on Day One - a lot more opportunities for arbitrage and high-frequency trading. The banks or hedge funds with the quickest developers and the sharpest quants always have a new market to themselves for a while, and make a ton of money off the low-hanging fruit. I expect to see some great short-term (<1s) opportunities where price movements in the underlying asset aren't reflected in the derivative price but there is sufficient liquidity on the exchange to execute a trade. Which, of course, means more profits for the bank (yay!) and large bonuses all round (yay!).

Good to see that the Law of Unintended Consequences is still in effect!

- KoW

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