Wednesday, April 05, 2006

'Threshold' List = Institutional Failure

Self-regulation is about as useful as allowing our legislators to vote themselves their own pay and benefit packages, asking the Petroleum Institute of America to study "Global Warming", or letting your five-year-old put themself to bed. With respect to the latter, they may eventually fall aslepp but not before raising cain or creating chaos. Such is the case with the SIA, NASD, NYSE or th NFA. You can be certain that, if something is in the public's interest, but NOT in the interest of the industry of it's most important constituent members, the outcome will undoubtedly be self-serving.

Americans are afflicted by a peculiar form of triumphalism, and like to think that they are better than others - especially in respect of the "heathen" of Asia and the "teeming unwashed masses" of less-developed or "developing" world. Of course, the US has no monopoly on this perception. "Gaijin" is the derogatory Japanese for "smelly foreigner", and Gwailo the equivalently derogatory "foreign devil for us ignorant "round-eyes". But when it comes to the stock market, however, America is indeed in need of some imported assistance. For one could not invent a more absurd or assinine market structure mechanism than the "specialist system" if you set out and tried to accomplish this with specific purpose and intent. Settlement, too, by comparison, seems byzantine, despite a supposedly efficient DTC and oodles of automation.

Currently there is furor is over the alledged evils off "naked shorting" or selling stock short in companies where one cannot or cynically does not make delivery. Being a simple minded, but utilitarian seer and prognosticator, I really do not get what the fuss is about. I can recall in my less-than-illustrious past trading in Singapore, sometime around 1990. In this near-serious and sober near-police state, failing to deliver was very serious stuff - almost as serious as getting caught by Lee Kuan Yew himself spitting your chewing gum upon the pavement. One would get a literal financial caning (which by the way they still emply in the schools).

What does this mean? It means that if you failed to punctually deliver the securities to the exchange for regular-way settlement (I think it was TDate+3 back then), the exchange was free (and I would point out more-than-eager) on TD+4 to execute a "buy-in" for immediate settlement. This meant - quite literally - an agent of the exchange walking on to the floor and bidding for the failed stock for IMMEDIATE DELIVERY. Of course few people had the stock available for immediate delivery, suffice to say, so the bids would scale up rapidly without encountering offers of satisfactory size. One would get SO HOSED!!! So irrevocably hosed and buggered, that one would do anything and everything never to let it happen again. As a broker, if your client failed to deliver, he'd be liable for pain so eagerly inflicted by the locals. And if ti was the fault of the client 's custodian, then "guess what?" Yes, he'd be liable to satisfy the claim. Not exactly rocket science, but very very effective at eliminating "fails" and insuring stock was delivered for settlement. Back in NYSE and NASDAQ-land, everyone seems caught in a daisy chain where it's OK not to deliver if someone doesn;t make delivery to you. Why? Perhaps because we are a permissive society? Hmmm....while very plausible, it's probably off of the mark. The real reason is more likely to be that it's simply not in the members' "best interests".

Anyway, I think back wistfully to those days when some stupid disorganized and unpunctual 'gwai-lo' "failed", and an eager young asian broker walks onto the floor and starts bidding for stock. All the local banks (the ones with the potential to deliver the stock) wait....look unimpressed at their watches....consider what to order for lunch, pick up a newspaper.... waiting...waiting... for the price to be bid up to an impressively painful level - in order to give the smug foreigner a financial rogering he'll remember well past the coming Chinese New Year!

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