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Circuit Breakers, Grexit, and Asymmetric Information


Zerohedge, Did The SEC Hint At A 7% Market Plunge? here.

This is how the market-wide circuit breaker language will look going forward:

  • Reducing the market decline percentage thresholds needed to trigger a circuit breaker to 7, 13, and 20percent from the prior day’s closing price, rather than declines of 10, 20, or 30 percent.
  • Shortening the duration of trading halts that do not close the market for the day to 15 minutes, from 30, 60, or 120 minutes.
  • Simplifying the structure of the circuit breakers so that there are only two relevant trigger time periods, those that occur before 3:25 p.m. and those that occur on or after 3:25 p.m. The two periods replace the current six-period structure.
  • Using the broader S&P 500 Index, rather than the Dow Jones Industrial Average, as the pricing reference to measure a market decline.
  • Requiring the trigger thresholds to be recalculated daily rather than quarterly.

Additional, the SEC also adopted less relevant single-stock trading halts.

Zerohedge,  Why A Grexit Would Make Lehman Look Like Childs Play, here.  Tchir via Durden.

Again, I fail to see the optimistic case of a Grexit.  Every time I try and play through scenarios where the IMF and ECB come to the rescue, it seems like it will be far too little and far too late.  Maybe the powers that be are smarter and have figured out a plan, but given their track record, that is hard to believe.  The more they look at the situation, the more I am convinced they will see not only how potentially awful the situation becomes, but that the cost to avoiding it right now are relatively small, and with proper preparation a Grexit can be managed down the road.

I still think we should have had more Lehman moments.  In fact, not letting the AIG moment occur was probably a bigger mistake, but most politicians have taken the lesson never to let a “Lehman” happen again, so once they see that Greece is Lehman on steroids, they will back down and figure out enough to give Europe and the markets a solid kick.

Levine, DealBreaker, The CDS Market For Lemons, here.

A stylized picture of a credit default swap is that it’s a way for a bank to offload to the market the credit risk of loans that it makes, while still funding those loans and making a profit on them. If you start from that stylized picture, you must at some point get comfortable with the stylized fact that this market is probably rife with insider trading. Turns out it is!Part of the reason for that is that it’s maybe legal,* part of it is just the general run of market-participantscumminess,** but there’s also the fact that the basic model sort of requires it. Here is the basic model:

  • private side bank employees evaluate a company for a loan, using lender materials that contain nonpublic information and banker relationships that are all about nonpublic information,***
  • private side bank employees negotiate and fund that loan with a company,
  • [magic happens], and
  • public side bank employees buy CDS on some but not all of the companies that the bank lends to in sizes that vary among companies.

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