Wednesday, June 14, 2006

The State of the Art

By Todd Harrison
Minyanville's News & Views

Editor's Note: This is a revamped look at the the state of the financial arena. This article was originally published last year and has been updated to reflect current market trends. Enjoy!

"It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another." Gordon Gekko

You don't have to be a big hitter to see that Wall Street has forever changed. What was traditionally an exclusive club of power players and money makers became a household hobby when technology made enablers of the mainstream. In the storied history of the financial markets, the rate of change has been nothing short of remarkable. The last ten years revolutionized an industry once known for clubby relationships and handshake agreements. The next ten years will forever alter the structural DNA as the old guard chases an ever-evolving digital world.

When I started at Morgan Stanley, I arrived at my turret while the skies were still dark and transcribed our derivative positions by hand. As ancient as it sounds, the risk management approach was that arcane. We "paired" single stock positions into hand-written strategies in an attempt to manage the complex components of our collective risk puzzle. That meticulous process was standard practice on the Street as traders relied on an acquired acumen and scribbled T-accounts to base million dollar decisions. It was an innocent approach to an intricate machination, where inefficiencies were commonplace until arbitrage emerged to capture risk-free returns.

I remember when we started pricing over-the-counter products and would "win" business by 30, 40 or 50 volatility points (a subjective assignment of valuation). Customers could "collar" their stock and lay off risk without the requisite footprints and we gladly facilitated the orders. Technology companies also awoke to write naked puts in lieu of stock buy-backs. If their short options were exercised, their cost basis was cheaper than it would have been in the open market. If not, the premium expired worthless and the income slipped through a tax-free loophole. Microsoft did it. So did Dell. Intel too. They were happy campers and our firm was a profit machine as the wheels of capitalism continued to grease a seamless coexistence. In time, as other sell-side players entered the market, the relative edges rounded and...
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Anonymous Anonymous said...

This is very interesting site... » » »

12:49 PM  
Anonymous Anonymous said...

That's a great story. Waiting for more. » » »

7:36 PM  
Anonymous Anonymous said...

Excellent, love it! »

4:11 AM  

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