John Ramsay
Traders Magazine Online News

Stock Market Data: How to Create Competition and Restore Fairness

In this commentary, IEX's John Ramsay delves into the topic of market data and suggests ways to foster greater competition in provision and ultimately restore fairness.

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February 22, 2010

Of Monopolies and Clearing OTC Derivatives

By Gregory Bresiger, Editor

Antitrust law critics such as economists Thomas Sowell and Murray Rothbard have argued that the monopoly laws are superfluous. Even in a business in which there is only one firm, provided there is no legal bar to others entering, the benefits of potential competition exist, they contend.

We have just witnessed an example of such in the clearing business. Nasdaq officials last year said they were going to take on the clearing industry's utility, the Depository Trust & Clearing Corp., and its subsidiaries. Nasdaq officials promised lower fees and better service.

Now, as CQ&D goes to press, Nasdaq has said it has decided not to begin a new clearing business, as we detail in our Briefs section. Although DTCC officials may disagree, just the possibility of competition from a new entry certainly affected them. Nasdaq may have been wrong in claiming that over the past year, DTCC made wholesale changes in response to the possibility of Nasdaq. Nevertheless, competition-even just potential competition-helps clients and can change how an industry operates.

Another key factor in how an industry operates is the amount of rules and regulations. The practices of over-the-counter derivatives clearing appear to be on the verge of major changes. The U.S. House of Representatives Financial Services Committee has been moving ahead with a bill governing derivatives clearing. Indeed, as CQ&D went to press, major new laws governing the clearing of these sometimes exotic financial instruments were on the congressional fast track.

Our cover story explains how a plan to mandate the clearing of OTC derivatives has the backing of the Obama administration. The current dealer-to-dealer model, one in which highly collateralized OTC derivatives swap dealers bypass clearinghouses and exchanges, is in the crosshairs of lawmakers.

The measure's supporters are arguing it is needed to prevent another market meltdown. Opponents believe it will hurt the business of trading and processing the OTC derivative by overloading it with new rules. Yet almost everyone agrees that the OTC derivative is vitally needed for all manner of private and public institutions that must hedge. It is something we have documented in these pages over the last few issues, as major players grapple with counterparty risk.

Counterparty risk was also on the mind of a top DTCC official when she recently sat down with CQ&D. Please see our Q&A. Finally, Fidelity Investments clearing operation, an industry heavyweight, is moving back into the international arena. Read about it in our Briefs section. Have a happy Thanksgiving.


Gregory Bresiger



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