times change

david52_gwDecember 21, 2012

Exchange Sale Reflects New Realities of Trading

By BEN PROTESS and NATHANIEL POPPER

On a warm day in Boca Raton, Fla., the host of a reception for an annual financial conference was not a big bank or a powerful exchange as in years past, but a young firm based in Atlanta.

-snip -
That event, some four years ago, was the Wall Street equivalent of a coming-out party for the firm, IntercontinentalExchange, or ICE, an electronic operator of markets for derivatives and commodities. Now, the markets upstart is announcing itself to a much larger world with an $8.2 billion deal to buy the symbolic cradle of American capitalism, the New York Stock Exchange.

The takeover illustrates starkly how trading in commodities and derivatives has become much more lucrative than trading in the shares of companies. Warren E. Buffett warned in 2003 that the "derivatives genie is now well out of the bottle," and that the genie, even after a global financial crisis, was not going back. Currently, derivatives - financial bets tied to underlying assets like oil prices or interest rates, among other things - are a $600 trillion market. Even the parent of the N.Y.S.E. attracted its suitor largely because of its ownership of Liffe, a major derivatives exchange in London.

-snip - The financial industry often does so electronically and through platforms in cities as scattered as London, Chicago and Atlanta. The biggest bonuses each year are typically for traders who reaped rich gains on these often complex financial products.

-snip-

The success of the newly combined companies hinges on the derivatives business. ICE is hoping that a greater share of derivatives trading will go through its clearinghouse operations, which act as backstops in case one party defaults. It is being aided by the Dodd-Frank financial regulatory overhaul, which is forcing Wall Street banks to push their derivatives trades into clearinghouses and regulated exchanges.

"For the past decade, our solutions made our markets increasingly electronic and increasingly clear," Jeffrey C. Sprecher, chief executive of ICE, said this month. "Today, financial reform is imposing that vision on many markets through a rule-making process."

While Dodd-Frank compliance is still in its early days, and the volume of derivatives trading remains depressed amid broader economic uncertainty, the law is ultimately expected to cement ICE's business model into the regulatory code.

"Despite the complaints, there's no question that at the end of the day, Dodd-Frank will be a financial boon to exchanges," said Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, which regulates derivatives.

Still, such a development will not do much for the traditional business of the New York Stock Exchange. Mr. Sprecher said on Thursday that he was committed to keeping the floor of the exchange open. But according to people briefed on his plans, he intends to use the stock trading operation and its steady cash-generating abilities to finance future deals and expansion efforts.

Nowhere have the changing fortunes of ICE and the parent of the New York exchange, NYSE Euronext, been more apparent than in their value on the stock market. In April 2011, when ICE first tried to acquire NYSE Euronext in league with Nasdaq OMX, it was worth about $1.5 billion less than the New York company. Just over a year later, ICE was worth nearly $4 billion more than NYSE Euronext, even with less than a third of its revenue.

ICE was founded in 2000 by Mr. Sprecher, who began his career developing power plants. In the 1990s, he saw that many power companies and financial firms wanted to hedge their investments in energy with financial contracts, but the market for these contracts was disorganized and opaque.

Mr. Sprecher bought an obscure exchange for buying and selling electricity in Atlanta and turned it into ICE with financing from BP and Wall Street firms, including Goldman Sachs and Morgan Stanley.

Banks were drawn to the idea of a standardized place to buy and sell derivatives tied to the value of oil and other commodities. But they also hoped to create a competitor to the virtual monopoly position being built up by the Chicago Mercantile Exchange in futures trading.

"You talk to people in Chicago, they basically think that ICE is just a front for the banks," said Craig Pirrong, an expert in futures trading and director of the Global Energy Management Institute at the University of Houston.

As the company grew through a quick series of acquisitions, Mr. Sprecher won a reputation for being the "enfant terrible" of the energy industry, with a "sharp eye for identifying opportunities and seizing on them in a very aggressive way," Dr. Pirrong said.

Early on, ICE sought to move all trading onto computers, allowing firms to buy and sell contracts 24 hours a day. Soon after buying the International Petroleum Exchange in London, ICE shut down its trading floor.

-snip -

"The reality is that there are incentives to convert swaps into futures, where there's less competition," said Richard M. McVey, chief executive of MarketAxess, an independent trading platform that is expanding into the swaps business. "There's no requirement for CME and ICE to open their futures clearinghouses to other exchanges."

Despite its growing prominence, ICE has a small footprint in Washington. With only two full-time lobbyists, the company relies on Mr. Sprecher to communicate with regulators.

-snip - end quote

As we continue down the road to gambling vs that old fashioned capitalism, investing in roads, mines, factories, and so on - productive enterprises that create wealth. Now its placing bets with computers, hoping to win against the other playahs. And this guy owns the casino.

Here is a link that might be useful: link

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haydayhayday

"As we continue down the road to gambling vs that old fashioned capitalism, investing in roads, mines, factories, and so on - productive enterprises that create wealth."

And because of markets like this one, investing in roads, mines, factories and so on - productive enterprises that create wealth is a lot easier and a lot cheaper than it would be otherwise.

Just because you can't see it and don't want to believe it, doesn't make it not so.

Try going back to the really old days when you and your axe built your house.

My daughter will build and install your phone when you finish.

I won't have the time to say much more than this. The world's going to be ending soon and I'm not going to have the time trying to show you the error in your thinking. As much as I'd like to try.

Good luck with your house.

Hay

    Bookmark   December 21, 2012 at 4:54PM
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jmc01

"And this guy owns the casino."

No, he doesn't. It's owned by loads of shareholders.

    Bookmark   December 21, 2012 at 5:21PM
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david52_gw

And because of markets like this one, investing in roads, mines, factories and so on - productive enterprises that create wealth is a lot easier and a lot cheaper than it would be otherwise.

Hows that? If some people not even remotely interested in using or mining copper bet heavily, on margin, on the future price of copper, covering their bet with something similar to Credit Default Swaps, that makes it easier to mine copper?

    Bookmark   December 21, 2012 at 6:30PM
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pnbrown

Yes, Dave, because when they (the copper speculators) get rich they will roof their mansion with copper, and the mine-operators will pay the trogoldyte serfs even less because there is less market for copper because there are fewer suburban houses being built because the housing market collapsed because of tranches, or something, and Bob's your uncle and your sheila's working at Wendy's.

    Bookmark   December 21, 2012 at 6:37PM
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david52_gw

If $600 trillion are busy in the derivatives market, trading paper and bets, how much does that leave to actually buy the mining equipment and pay the miners?

    Bookmark   December 21, 2012 at 7:16PM
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pnbrown

Is it real wealth, though? I think it's traders moving smaller amounts of wealth around when their bets with each other come due.

    Bookmark   December 21, 2012 at 9:06PM
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Campanula UK Z8

Oh Dear - this imaginary money is actually completely obscure to me - I have absolutely no comprehension of what your post is implying, David.....and this is, I am certain, why the financial sector gets away with a gigantic emperor's new clothes scam - because the whole set-up is deliberately vague, twisted and jargon-ridden. I am not unintelligent (I hope) but truly, I am bored and baffled by this sort of financial finagling.....

    Bookmark   December 22, 2012 at 6:48AM
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maddie_athome

It's a parallel/shadow system, not really creating anything of substance. Hot air.

    Bookmark   December 22, 2012 at 8:34AM
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marshallz10(z9-10 CA)

Sort of another form of internet gambling but playing against houses with perhaps better sources of information. Some sort of three-cups-and-one-pea monte?

    Bookmark   December 22, 2012 at 9:05AM
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haydayhayday

"It's a parallel/shadow system, not really creating anything of substance."

People get mortgages every single day. Thousands and thousands of them. People buy health insurance every single day. Millions of them.

I looked up "parallel/shadow system" in my glossary of economic terms.

Hot Air, indeed.

Hay

    Bookmark   December 22, 2012 at 9:29AM
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haydayhayday

"If $600 trillion are busy in the derivatives market, trading paper and bets, how much does that leave to actually buy the mining equipment and pay the miners?"

I'll tell you what. I'll bet you, oh, $10,000 that you're wrong. I'll hit the send button here and you can tell the rest of the people here how much of the work I need to do today will have been stopped from my doing it.

$10, 000 worth of my work? I wish.

(I'm having a deja vu moment. This is the exact same "logic" we discussed when we talked "speculation". I hope you can appreciate my reluctance to go through the exact same discussion again. Not until me and Marshall get back from Vegas.)

Hay

    Bookmark   December 22, 2012 at 9:30AM
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haydayhayday

"that makes it easier to mine copper?"

Yep.

If you happen to find a rich vein of copper in your backyard while you're building your house, I'll send you a pickaxe.

Hay

    Bookmark   December 22, 2012 at 9:33AM
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haydayhayday

"I have absolutely no comprehension of what your post is implying, David.....and this is, I am certain, why the financial sector gets away with a gigantic emperor's new clothes scam..."

Okey, Dokey...

If I don't understand something, if it's vague, then I naturally will assume that there's evil intent, a scam or something else vile going on.

Take "higson particle" for instance. I was OK with Physics up until that point. Now I think it's all a big scam.

Sometimes I think people come into these discussions with a bias. I don't why I think that.

Hay

This post was edited by haydayhayday on Sat, Dec 22, 12 at 10:12

    Bookmark   December 22, 2012 at 9:36AM
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marshallz10(z9-10 CA)

Hey, Hay! I went to Vegas and you didn't show, you old empty suit you.

    Bookmark   December 22, 2012 at 9:51AM
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pnbrown

It is gambling. Industry continues, albeit a little less now that that there is less top-grade crude oil being produced.

Speculation on the future performance of industry is gambling, no different from speculating on the outcome of a horse-race. One could make the argument that horse-racing produces wealth, because the accommodation of the gamblers requires fine horses, and trainers, and horse-feed, and tracks to be built, etc. But that is a tiny fraction of the actual wealth (generated by other means) that trades hands between gamblers, so most of it is zero wealth creation.

    Bookmark   December 22, 2012 at 11:06AM
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marshallz10(z9-10 CA)

The derivatives are monetized at levels set by trading beyond the opening prices established. "Paper" wealth is thus created (or lost).

    Bookmark   December 22, 2012 at 11:23AM
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haydayhayday

If I get a mortgage on my house, I've just created a "derivative". In effect, I no longer own the house. I have an "option" on the house. An option that I can choose to either let expire by not paying the next monthly mortgage check or continue to own by paying that check.

All those people who are now "under water" on their houses? The ones that have chosen to simply walk away? They've chosen not to extend their "option".

You want to call people who buy a house with a mortgage a gambler?

Let's get our terms straight.

Hay

    Bookmark   December 22, 2012 at 11:36AM
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haydayhayday

"Speculation on the future performance of industry is gambling."

And if I invest some money in the stock market, hoping to retire someday, I'm a gambler?

I'd think someone who didn't save and invest would be taking a much larger gamble.

But, then,who am I to argue?

Hay

    Bookmark   December 22, 2012 at 11:51AM
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david52_gw

I think the horse racing analogy is the closest. Really wealthy people gambling on some contest. With the Gvt bailing them out if everything goes south.

Hay, if I discover copper in my back yard, I'd form a company, put out a prospectus, sell shares, buy equipment, pay miners, mine it and then sell it on the futures market.

Not start off by buying copper options on the futures market.

    Bookmark   December 22, 2012 at 1:26PM
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Campanula UK Z8

But Hay, there WAS a scam going on - I am not assuming anything.
The LIBOR fixing scandal shows they are still at it.

Nope, no bias here but I have been attempting (and largely failing)to understand how the financial system works (or not) and just exactly what checks and balances are in place.

    Bookmark   December 22, 2012 at 1:35PM
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david52_gw

Labrea starts threads pointing out all the banks and investment houses being fined hundreds of millions for the scams they were running.

To a collective *yawn*. UBS just got fined $1.5 billion. And this must come as a total shock, thats where former Senator Phil Gramm (of deregulatory fame) is happily employed.

This post was edited by david52 on Sat, Dec 22, 12 at 13:47

    Bookmark   December 22, 2012 at 1:41PM
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haydayhayday

"I think the horse racing analogy is the closest."

Okey, Dokey. The next time you need a mortgage or insurance on your house, head on down to the racetrack.

You think you "own" your house? My goodness, NO! You have a bit of a derivative in it. If you have a mortgage, you can be said to hold an option on it. An option to buy it from the bank so long as you keep making the mortgage payments. A derivative.

And even then you don't completely own it. Fire Insurance? More derivatives. When your house burns down, it will be the insurance company that owns it. You get a little side payment, the settlement. More derivatives.

And, if you've left it to your kids in a will, then your kids have a stake in it. Them and the tax collector. Derivatives seem to be everywhere!!! It just doesn't seem to end.

"If $600 trillion are busy in the derivatives market, trading paper and bets, how much does that leave to actually buy the mining equipment and pay the miners?

And, in keeping with your race track analogy, if me and my friends all head down to the racetrack for an afternoon where thousands and thousands and thousands of dollars, maybe even millions, of money gets bet, but at the end of the day, most people will walk home with just a little bit of a loss to the house for its take, I don't know that trillions of dollars would have been diverted from developing your copper mine. After all, we all need to take a day off from building our houses and picking away in the mine shaft once in a while.

Hay

    Bookmark   December 27, 2012 at 9:34AM
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marshallz10(z9-10 CA)

And time for me and hay to hit Vegas...

    Bookmark   December 27, 2012 at 10:15AM
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