This is Edge in Option

Discussion in 'Options' started by galvinlee888, Dec 12, 2010.


    If you are one of member in the elite team, then you have an edge to trade , or else you are only chasing the wind - Technical Analysis, Fundenmental Analysis, Physo/Crowd Theory, ... All BS. Your win or lose in the trade are controlled by somebody else ..

    Let me know what you think ?

    The full article from CNBC ..

    A Secretive Banking Elite Rules Trading in Derivatives

    On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

    The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable ¡ª and controversial ¡ª fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

    Drawn from giants like JPMorgan Chase [JPM 41.43 0.62 (+1.52%) ], Goldman Sachs [GS 168.47 2.02 (+1.21%) ] and Morgan Stanley [MS 26.95 0.24 (+0.9%) ], the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

    In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

    The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

    Banks¡¯ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer¡¯s home heating-oil company in Westchester County, north of New York City.

    This fall, many of Mr. Singer¡¯s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.

    But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices ¡ª and his customers¡¯ prices ¡ª could be, he says, because banks don¡¯t disclose fees associated with the derivatives.

    Current DateTime: 06:06:37 12 Dec 2010
    LinksList Documentid: 40628427
    Open Warfare on Airgas Board?Jumped or Pushed at UBS?What the "Goldman Squeeze" Tells Us
    ¡°At the end of the day, I don¡¯t know if I got a fair price, or what they¡¯re charging me,¡± Mr. Singer said.

    Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments ¡ª an amount that almost certainly would be lower if there were more competition and transparent prices.

    Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef.

    The marketplace as it functions now ¡°adds up to higher costs to all Americans,¡± said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said.

    "We are not a nobody."

    Sanjay Kannabadi
    CEO, Bny Mellon Clearing
    But big banks influence the rules governing derivatives through a variety of industry groups. The banks¡¯ latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York.

    Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks¡¯ control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners.

    The Department of Justice is looking into derivatives, too. The department¡¯s antitrust unit is actively investigating ¡°the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,¡± according to a department spokeswoman.

    Indeed, the derivatives market today reminds some experts of the Nasdaq stock market in the 1990s. Back then, the Justice Department discovered that Nasdaq market makers were secretly colluding to protect their own profits. Following that scandal, reforms and electronic trading systems cut Nasdaq stock trading costs to 1/20th of their former level ¡ª an enormous savings for investors.

    ¡°When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It¡¯s antitrust 101,¡± said Robert E. Litan, who helped oversee the Justice Department¡¯s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. ¡°The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.¡±

    Representatives from the nine banks that dominate the market declined to comment on the Department of Justice investigation.

    Clearing involves keeping track of trades and providing a central repository for money backing those wagers. A spokeswoman for Deutsche Bank [DB 52.93 0.68 (+1.3%) ], which is among the most influential of the group, said this system will reduce the risks in the market. She said that Deutsche is focused on ensuring this process is put in place without disrupting the marketplace.

    The Deutsche spokeswoman also said the banks¡¯ role in this process has been a success, saying in a statement that the effort ¡°is one of the best examples of public-private partnerships.¡±

    Established, But Can¡¯t Get In

    The Bank of New York Mellon¡¯s [BK 28.95 -0.03 (-0.1%) ] origins go back to 1784, when it was founded by Alexander Hamilton. Today, it provides administrative services on more than $23 trillion of institutional money.

    Recently, the bank has been seeking to enter the inner circle of the derivatives market, but so far, it has been rebuffed.

    Bank of New York officials say they have been thwarted by competitors who control important committees at the new clearinghouses, which were set up in the wake of the financial crisis.

    Current DateTime: 06:20:39 12 Dec 2010
    LinksList Documentid: 40628427
    Open Warfare on Airgas Board?Jumped or Pushed at UBS?What the "Goldman Squeeze" Tells Us
    Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market.

    The bank dismisses that explanation as absurd. ¡°We are not a nobody,¡± said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business. ¡°But we don¡¯t qualify. We certainly think that¡¯s kind of crazy.¡±

    more go to the link in CNBC ..
    :D :D