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LuckyOne

It Seems That The Justice Department .......

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http://www.bloomberg.com/apps/news?pid=206...id=aJwAyZM0oVFU

The CDS market has always been a funny business. The banks collectively own a large part of the largest firm that collects and then redistributes prices back to the contributors which are then used as "market prices" against which portfolios are valued.

While I am not sure whether or not this constitutes insider trading, it has always amused me that people treat prices from this service as a market price when it is often just a consensus price that doesn't trade.

The DoJ seem to be less amused ......

Part of the article below .....

July 14 (Bloomberg) -- The U.S. Justice Department is investigating the market for credit-default swaps, according to Markit Group Ltd., the data provider majority-owned by Wall Street’s largest banks.

“Markit has been informed of an investigation by the Department of Justice into the credit-derivatives and related markets,†spokeswoman Teresa Chick said yesterday in an e- mailed statement in response to questions from Bloomberg News. She declined to comment on the nature of the investigation. “We will work with the Department to provide any information requested of us.â€

The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information, according to three people familiar with the matter. U.S. lawmakers plan to regulate the $592 trillion over-the-counter derivatives market, which includes credit-default swaps blamed for helping worsen the biggest financial calamity since the Great Depression.

Credit-default swaps -- contracts that protect against or speculate on corporate defaults by paying the buyer the face value of a bond or loan if a company fails to meet its debt agreements -- ballooned almost 100-fold within seven years to represent about $62 trillion by the end of 2007, according to estimates from the New York-based International Swaps & Derivatives Association.

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No doubt 3 individuals will be thrown in jail to appease the baying mob, eventually. Probably a Brit will be among them, together with a hyphenated un-American.

The truth is, the banks own the politicians, through bribes. So no one important will go to to jail. IMO.

My view is, they conspired to set up a scheme, with rigged prices and using invented money, to siphon the largest part possible of people's productive labour into their own pockets, by pushing up the prices of basic necessities towards infinite levels. Now they have to make most of the winnings (which were invested in bank accounts, shares etc) disappear, and that will leave only their own winnings, held in gold. They did it knowingly and deliberately, and "accident" is only their get-out of jail free card.

The only thing they really fear, is being hunted down and shot. So expect a lot of chat about solidarity and working together to fix things.

Rant over.

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http://www.bloomberg.com/apps/news?pid=206...id=aJwAyZM0oVFU

The CDS market has always been a funny business. The banks collectively own a large part of the largest firm that collects and then redistributes prices back to the contributors which are then used as "market prices" against which portfolios are valued.

While I am not sure whether or not this constitutes insider trading, it has always amused me that people treat prices from this service as a market price when it is often just a consensus price that doesn't trade.

The DoJ seem to be less amused ......

Part of the article below .....

"The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information"

How?

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I wonder if London will become the scapegoat for all this mess?

Not impossible.

MarkIt are based here.

We seem to have had more numerate, rigourous people (Brits, French, Italians, Russians etc) looking for post cold war jobs here than anywhere else so a lot of the financial "innovation" was born in London.

The irony that the end of the cold war meant that people who would ordinarily be designing missile guidance systems, smart bombs and other weapons ended up building "financial weapons of mass destruction" (to use Buffett's phrase) has not escaped me .....

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"The antitrust division sent civil investigative notices this month to banks that own London-based Markit to determine if they have unfair access to price information"

How?

It is an interesting situation.

Let's pretend that it was air fares instead of CDS spreads. If MarkIt were owned by airlines and collected airfares on all routes globally from all airlines and then redistributed the fares back to the airlines, the anti-trust / competition people would probably be a little upset if the airlines then used that information to set global airfares and did not make it available to consumers.

I know that CDS is not exactly the same but I can see the risk to the CDS market if the DOJ feel that the information gathering and dissemination process were anti-competitive.

Edited by LuckyOne

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The only thing they really fear, is being hunted down and shot. So expect a lot of chat about solidarity and working together to fix things.

Rant over.

Good Rant! I'm hoping for the "hunted and shot" scenario or at least thrown in jail, along with all the politicians that turned a blind eye.

Edited by HostPaul TAFKA Rover2000

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It is an interesting situation.

Let's pretend that it was air fares instead of CDS spreads. If MarkIt were owned by airlines and collected airfares on all routes globally from all airlines and then redistributed the fares back to the airlines, the anti-trust / competition people would probably be a little upset if the airlines then used that information to set global airfares and did not make it available to consumers.

I know that CDS is not exactly the same but I can see the risk to the CDS market if the DOJ feel that the information gathering and dissemination process were anti-competitive.

"It is an interesting situation."

It is indeed, as I don't understand what the complaint is about. The last time I checked, Markit lagged their data by at least an hour. There are other sources for getting data, such as Quotevision (which I worked on)

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My view is, they conspired to set up a scheme, with rigged prices and using invented money, to siphon the largest part possible of people's productive labour into their own pockets, by pushing up the prices of basic necessities towards infinite levels.

My view is you are a random word generator, as your verbal effluent bears little resemblence to the real world.

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Not impossible.

MarkIt are based here.

We seem to have had more numerate, rigourous people (Brits, French, Italians, Russians etc) looking for post cold war jobs here than anywhere else so a lot of the financial "innovation" was born in London.

The irony that the end of the cold war meant that people who would ordinarily be designing missile guidance systems, smart bombs and other weapons ended up building "financial weapons of mass destruction" (to use Buffett's phrase) has not escaped me .....

They worked with a small bunch of numbers that blew up in their faces. Not particularly smart.

Translate this level of epic failure into almost any other engineering/science discipline and you would be in caught for manslaughter, defective product lawsuits and out of business.

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They worked with a small bunch of numbers that blew up in their faces. Not particularly smart.

Translate this level of epic failure into almost any other engineering/science discipline and you would be in caught for manslaughter, defective product lawsuits and out of business.

We are talking about Markit?

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"It is an interesting situation."

It is indeed, as I don't understand what the complaint is about. The last time I checked, Markit lagged their data by at least an hour. There are other sources for getting data, such as Quotevision (which I worked on)

I agree that there is some competition in the single name space although MarkIt seem to dominate.

The index /index tranche space might be a little more problematic. They own CDX and iTraxx which some argue have driven down the "market" prices of a lot of product which has caused a lot of the losses that we have seen in the last 2 years or so.

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I agree that there is some competition in the single name space although MarkIt seem to dominate.

The index /index tranche space might be a little more problematic. They own CDX and iTraxx which some argue have driven down the "market" prices of a lot of product which has caused a lot of the losses that we have seen in the last 2 years or so.

"I agree that there is some competition in the single name space although MarkIt seem to dominate."

I disagree if we are talking about real time data. For sell side, the broker screens such as CreditEx give far more timely info - Markit is used for end of day marking.

"They own CDX and iTraxx which some argue have driven down the "market" prices of a lot of product which has caused a lot of the losses that we have seen in the last 2 years or so"

I fail to see how Markit are to blame here - they merely managed constituents in the indices. The argument was that structured products such as CPDOs drove down indices as they were selling a lot of protection, although I am unaware of large scale losses such as experienced in mortgage.

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They worked with a small bunch of numbers that blew up in their faces. Not particularly smart.

Translate this level of epic failure into almost any other engineering/science discipline and you would be in caught for manslaughter, defective product lawsuits and out of business.

It was actually a management failure. The senior management of banks got themselves into a position where they were forced to delegate too much authority and autonomy to their "quants" because management did not understand what the riskiest parts of their businesses were doing.

We got into the dangerous situation where the engineers became the architects. The two disciplines should never have been merged.

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We are talking about Markit?

I wasn't necessarily referring to them specifically - the market, the participants and the regulators. All manned by highly skilled ponzi market blowers.

However, who knows whether Markit themselves are fiddling the figures, their ABX indices look somewhat reflective of a collapsed ponzi scheme. Maybe that is what some people are worried about, maybe they are reflecting the true market too much and need "altering". :lol:

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"I agree that there is some competition in the single name space although MarkIt seem to dominate."

I disagree if we are talking about real time data. For sell side, the broker screens such as CreditEx give far more timely info - Markit is used for end of day marking.

"They own CDX and iTraxx which some argue have driven down the "market" prices of a lot of product which has caused a lot of the losses that we have seen in the last 2 years or so"

I fail to see how Markit are to blame here - they merely managed constituents in the indices. The argument was that structured products such as CPDOs drove down indices as they were selling a lot of protection, although I am unaware of large scale losses such as experienced in mortgage.

[

/quote

A very clever marketing excercise by markit to promote their new sovs index cds rollout in sep. the info that the market has incresed fivefold since lehmans folded is totally inaccurate. im sitting in the sovs cds market as im writing this by the way . the price they gave for uk cds is in fact twice the price im looking at right now on my screen, which is good for about 100 million each side. however will be looking forward to the new product in sep .

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"I agree that there is some competition in the single name space although MarkIt seem to dominate."

I disagree if we are talking about real time data. For sell side, the broker screens such as CreditEx give far more timely info - Markit is used for end of day marking.

"They own CDX and iTraxx which some argue have driven down the "market" prices of a lot of product which has caused a lot of the losses that we have seen in the last 2 years or so"

I fail to see how Markit are to blame here - they merely managed constituents in the indices. The argument was that structured products such as CPDOs drove down indices as they were selling a lot of protection, although I am unaware of large scale losses such as experienced in mortgage.

If there was any manipulation of accounting numbers, it was much more likely to have happened during the mark to model process than from the daily trading process.

My view is that broker prices are often merely MarkIt plus and minus a few percent of spread anyway which reinforces the DoJ's view.

I understand much of what you are saying from an insider's point of view.

We now live in a new world now where behaviours and actions will be examined outside their original context and without the benefit of instituional memory. I expect that there will be a lot unanticipated consequences of this new world that will be perceived as "unfair" by those who have an in depth understanding of how markets actually work.

Edited by LuckyOne

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A very clever marketing excercise by markit to promote their new sovs index cds rollout in sep. the info that the market has incresed fivefold since lehmans folded is totally inaccurate. im sitting in the sovs cds market as im writing this by the way . the price they gave for uk cds is in fact twice the price im looking at right now on my screen, which is good for about 100 million each side. however will be looking forward to the new product in sep .

The new sov data in their file broke my download. Talking of which, their data quality is sometime suspect (bond coupons, duplicates etc). I reckon I have to ping them an email once a week to fix stuff.

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My view is that broker prices are often merely MarkIt plus and minus a few percent of spread anyway which reinforces the DoJ's view.

But that is assuming that the sell side use Markit intraday. I'm not sure that is the case. Assuming not, once the market opens, the Markit spreads are pretty much useless, as the market has already moved - time to look at the screens such as CreditEx.

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But that is assuming that the sell side use Markit intraday. I'm not sure that is the case. Assuming not, once the market opens, the Markit spreads are pretty much useless, as the market has already moved - time to look at the screens such as CreditEx.

The market as a whole has exposures to something like 10 points in the term structure of each of something like 5,000 ref obs.

The market needs 50,000 data points to mark their businesses to models every day if my guesses about the term structure and ref obs is correct.

I don't know how many live prices the brokers have at any one point in time but I would be suprised if it were more than 0.25% of those required to mark the businesses.

Screens are great but are not a comprehensive solution to the requirement to mark to model using fair market values (and nor is MarkIt in my view).

My experience is that the sell side use a combination of the "previous close" from MarkIt and "changes in index since the previous close" to price single name trades intra-day.

Edited by LuckyOne

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The market as a whole has exposures to something like 10 points in the term structure of each of something like 5,000 ref obs.

The market needs 50,000 data points to mark their businesses to models every day if my guesses about the term structure and ref obs is correct.

I don't know how many live prices the brokers have at any one point in time but I would be suprised if it were more than 0.25% of those required to mark the businesses.

Screens are great but are not a comprehensive solution to the requirement to mark to model using fair market values (and nor is MarkIt in my view).

My experience is that the sell side use a combination of the "previous close" from MarkIt and "changes in index since the previous close" to price single name trades intra-day.

From the article

"Justice Department investigators want to know if Markit’s bank shareholders received advantages as owners and providers of prices and trading patterns for credit-default swaps, said two of the people. The data from the market’s largest users is provided to more than 300 financial firms to set prices of the contracts in their portfolios, according to Markit’s Web site. "

I'm not really sure what the banks are supposed to be receiving that others don't

"The market needs 50,000 data points to mark their businesses to models every day if my guesses about the term structure and ref obs is correct. "

Why can't the buy side get the same info if they pay for the Markit dataset?

"I don't know how many live prices the brokers have at any one point in time"

From my experience when I was on the single name desk a year ago, coverage was good for indices and if you had enough screens (I think there were five main broker screens back then) I would guess a few hundred single names - most of the liquid ones I would guess

"but I would be suprised if it were more than 0.25% of those required to mark the businesses."

I'm not sure that is what is being debated by the DOJ??

"My experience is that the sell side use a combination of the "previous close" from MarkIt and "changes in index since the previous close" to price single name trades intra-day."

Agreed on the previous close, but not on using index to price single name, unless you are assuming the underlying index constituents are correlated.

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From the article

"Justice Department investigators want to know if Markit’s bank shareholders received advantages as owners and providers of prices and trading patterns for credit-default swaps, said two of the people. The data from the market’s largest users is provided to more than 300 financial firms to set prices of the contracts in their portfolios, according to Markit’s Web site. "

I'm not really sure what the banks are supposed to be receiving that others don't

"The market needs 50,000 data points to mark their businesses to models every day if my guesses about the term structure and ref obs is correct. "

Why can't the buy side get the same info if they pay for the Markit dataset?

"I don't know how many live prices the brokers have at any one point in time"

From my experience when I was on the single name desk a year ago, coverage was good for indices and if you had enough screens (I think there were five main broker screens back then) I would guess a few hundred single names - most of the liquid ones I would guess

"but I would be suprised if it were more than 0.25% of those required to mark the businesses."

I'm not sure that is what is being debated by the DOJ??

"My experience is that the sell side use a combination of the "previous close" from MarkIt and "changes in index since the previous close" to price single name trades intra-day."

Agreed on the previous close, but not on using index to price single name, unless you are assuming the underlying index constituents are correlated.

This is the beauty of the MarkIt business model. You send them the data. If it is close enough to the consensus, they send you back the consensus for a fee. If you do not provide them with data or are far enough away from the consensus, they will not send you back any data.

There is complete assymetry in transparency between the buy side and the sell side resulting from the way that the arrangement is set up.

An interpretation of the set-up is that it allows collusion (consensus sounds less ominous) between members of the sell side and prevents the buy side from gaining equal access to the data.

Edited by LuckyOne

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This is the beauty of the MarkIt business model. You send them the data. If it is close enough to the consensus, they send you back the consensus for a fee. If you do not provide them with data or are far enough away from the consensus, they will not send you back any data.

There is complete assymetry in transparency between the buy side and the sell side resulting from the way that the arrangement is set up.

An interpretation of the set-up is that it allows collusion (consensus sounds less ominous) between members of the sell side and prevents the buy side from gaining equal access to the data.

"or are far enough away from the consensus, they will not send you back any data"

Is this correct? I'm sure the datasets are the same irrespective of whether you have sent them a few dodgy names or not?

"An interpretation of the set-up is that it allows collusion"

I'm not sure how that would work. The banks would have to agree that they would all be on the same side of a deal and move the spread in a favourable direction. This sounds implausible, although not impossible

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