Blame Derivatives?
Here's a rather scary -- and under-reported -- aspect of the recent sell off: Derivatives activity linked to share falls
FT Excerpt:
"The recent sharp falls in stock markets appear to have been exacerbated by an unusual wave of derivatives activity on the part of hedge funds and big banks, traders yesterday indicated.
In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months - and these bets are now unravelling because volatility has increased sharply.
This forced selling has hurt equity futures index prices on markets such as the London International Futures Exchange - and depressed the value of cash equities as well, some observers suggest."
Whenever I am asked how on Earth Dow 6,800 is remotely possible, I give to answers:
a) Forced selling leads to irrational market levels;
2. Nasdaq 1,100 was similarly unthinkable;
>
Source:
Derivatives activity linked to share falls
Gillian Tett
Financial Times, May 19 2006 03:00
http://news.ft.com/cms/s/7edab4a6-e6d3-11da-a36e-0000779e2340.html
Friday, May 19, 2006 | 10:36 AM | Permalink
| Comments (15)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8341c52a953ef00d834c3fcd469e2
Listed below are links to weblogs that reference Blame Derivatives?:
Comments
I've been concerned about this for some time. The low volatility has encouraged increased risk in search for yield. Plus, everyone and their brother (i.e. Cody) has a hedge fund now. I think a derivative crisis will make LTCM look benign in comparison if it plays out the wrong way.
Posted by: emd | May 19, 2006 11:34:13 AM
The comments to this entry are closed.
