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February 22, 2010

The Clear and Present Danger of Risk

By Gregory Bresiger

Also in this article

Lower the risk of counterparty blowups, and do it now.

Such blowups are the critical issue facing clearing brokerages these days, according to officials of the industry's utility, the Depository Trust & Clearing Corp. The officials say they constantly hear requests for improved counterparty risk programs for all asset classes--apparently, everybody fears everybody else in a market in which so many big financial institutions have either perished or been on the verge of death.

This is happening at a time when DTCC members are trading more non-listed securities, or over-the-counter derivatives. And, by the way, this is also happening at a time when clearing firms, the same as almost every other business, face a tough fight for survival.

These were some of the subjects on the agenda when Susan Cosgrove, a CPA as well as DTCC's managing director for equities product management, recently sat down with CQ&D.

CQ&D: What is the state of the clearing business? I understand the number of transactions has declined compared with this point late in 2008.

Cosgrove: The ongoing economic problems have impacted trading activity across the markets, and as a result, our volumes are down considerably this year, from an average of 146 million transactions per day in 2008 to about 133 million so far this year. In fact, this will also be the first year in recent memory that the previous year's peak volume, which was 209 million transactions, does not become this year's average.


CQ&D: Whether you're comparing the peak or a daily average, that's a significant drop.

Cosgrove: Yes, but the number of shares we are processing, which is how a liquidity platform measures activity, is up significantly. Since January 2009, the average number of shares per transaction has jumped almost 115 percent-from 345 to 737. Actually, we hit a peak in August 2009, when we processed a record 97 billion total shares in a single day.


CQ&D: So there are fewer trades, but the average trade is bigger?

Cosgrove: Yes, it appears that trading patterns have shifted away from fewer shares at higher dollar values, which is typically what you'd see with the blue chips, to trades with more shares being traded at lower values.


CQ&D: Why are you seeing this trend of less activity in the blue chips and more in the small stocks?

Cosgrove: Traders would be in a better position to answer that question, but from feedback I heard at the recent Security Traders Association annual conference, they see opportunities in these stocks. And the platforms that support trading the Pink Sheets and sub-penny stocks have said that activity is strong in these types of securities.


CQ&D: Looking ahead toward next year, what are the types of products and services your members say they want?