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DRW continued

Matt Levine, Bloomberg, CFTC Sues Firm The Sues CFTC to Stop CFTC From Suing It, here.

So far so good. The problem is that the extra value came from the margining rules, but the futures were valued each day for margining purposes like so:*

1. If there were trades in a 15-minute settlement period at the close, the trading price set the value.

2. If there were no trades, but there were bids and/or offers, the bids and offers set the value.

3. If there were no trades, no bids and no offers, the swap curve set the value.

If this future market became a robust efficient market, then there would be lots of trades, and those trades would be arbitraged up to the theoretically correct price, which would be higher than the equivalent swap price because, remember, the futures are not really equivalent to the swaps. If on the other hand it was a ghost town with no trading, then the prices would default to the (incorrect!) equivalent swap prices.

High Frequency Traders Are a Little Too Slow, here.

So here we are with an interesting European Central Bank working paper from Jonathan Brogaard, Terrence Hendershott and Ryan Riordan about high frequency trading.* They’re mostly for it, which has naturally gotten them some attention. They think that the things you should measure are along the lines of “does high frequency trading improve market price discovery?” and “does it provide liquidity?” and I guess if they thought it was Bad, they’d be asking different questions. But they answer yes to their questions: They find that high frequency trading improves price discovery, and that it does not cause instability by withdrawing liquidity during volatile periods.

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