At Reuters, Felix Salmon has, predictably, the best take on the just-announced $8.2 deal for IntercontinentalExchange Inc. (ICE) to buy the New York Stock Exchange. Yes, that New York Stock Exchange, itself combined these days with another exchange called Euronext.
Felix's basic point — and this may require a bit of gray-cell exertion to get — is that there are basically two distinct worlds in which trading happens: the old school world of stocks, with which we're at least passingly familiar; and a new school world of trades in products that are based on some other product or asset — derivatives.
The derivatives market is vast. But the vast majority of people probably hadn't even heard of derivatives until the financial crisis, when "collateralized debt obligation" and "credit default swap" lurched into the popular vocabulary.
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He might not be worried about Greece's recent default and payout of credit default swaps. But some other people are.
I just discovered Tony Alfidi's blog and have been enjoying his uncensored views on a variety of tech and finance subjects. I agreed with him on Apple's mastery of planned obsolescence and now I'm tempted to agree with his verdict on credit default swaps (CDS) — a number of which just kicked in as Greece "defaulted" on some of its privately held sovereign dealt.
Some people think that CDS, despite their role in the financial crisis (they brought down AIG), remain useful, as a means of hedging risk and as a relatively recent example of financial innovation that was sadly misused.
Alfidi says un-uh:
I've always believed that credit default swaps are meaningless and even dangerous. [There's your Quote of the Week!] Banks and hedge funds use them to place directional bets with no regard for a counterparty's solvency. The European versions of AIG, whoever they are, can now breathe easier for a few weeks knowing they can get away with more uncapitalized CDS writing.