GTFM Chapter 1 Extract(1)

7/29/2019 GTFM Chapter 1 Extract(1)

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The Associate PRM Exam reading material extract from the PRM Guide to Financial Markets,published by McGraw-Hill (2008), ISBN 978-0-07-154648-5

Copyright 2004 C. Lawrence, A. Milne and The Professional Risk Managers International Association 1

The Structure of Financial Markets

Colin Lawrence and Alistair Milne1

Introduction

Market structure is important to risk managers primarily through its impact on

liquidity. A successful market, whether or not it exists in a physical location,brings together many buyers and sellers and is able to reduce search andtransaction costs. Such a market provides the best possible conditions forfinancial risk management. Institutional arrangements for trading are crucial inachieving large volumes, good liquidity and thus promoting effective riskmanagement.

Risk managers should concern themselves with market structure because it canalso affect other aspects of risk, including credit risk, business risks, operational

risk and basis risk. For example, trades on over-the-counter markets often havegreater credit risk than those transacted on exchanges, but, because they can betailored to individual requirements, they have less basis risk. An example ofbusiness risk is the capture of trading by electronic communications networks,

reducing the order volumes and revenues of NASDAQ dealer-brokers.

Global Markets and Their Terminology

Trading of financial securities, derivatives, and other financial contracts takesplace in two settings: formal financial exchanges and more loosely organisedover-the-counter (OTC) markets.

Financial exchanges are formalised trading institutions. Rights to trade are limitedto members and there are detailed and explicit rules governing the conduct of

trading and the contracts or securities that are traded. Exchanges also collect anddisseminate pricing information and facilitate post-trade risk management andfinal trade settlement. OTC refers to any financial market transaction that doesnot take place on a formal exchange. The attraction of an OTC trade is that thebuyer and seller are free to negotiate all the contractual details. Participants donot, however, have the protection of exchange procedures and rules.

Most equity trading takes place through exchanges. The principle that liquidity is

linked to market volumes can be illustrated in equity markets. The bulk of equitytrading, world-wide, is concentrated in a few major markets, mostly equityexchanges such as the NYSE, NASDAQ and the London Stock Exchange. The fiveleading markets account for more than sixty percent of equity market

capitalisation and equity trading.

Recently there has been a trend towards consolidation of these major exchanges.NYSE has merged with EuroNext, London Stock Exchange has acquired the BorsaItalia, and other mergers have been mooted. These mergers are not yet having amajor impact on the conduct of equity trading. There are substantial barriers,notably regulation and clearing and settlement, which force these merged entitiesto continue operating on a separate basis. If these barriers eventually are

overcome, however, technological merging of activities will then be possible andwe will see truly global equity exchanges.

1 Dr Colin Lawrence, is Director, Prudential Risk Division, Financial Services Authority, United Kingdom. He is also aVisiting Professor in the Faculty of Finance, Cass Business School, London. Alistair Milne is Senior Lecturer, Facultyof Finance, Cass Business School, London. We are indebted to Carol Alexander and Elizabeth Sheedy for theircomments but we remain responsible for all errors.


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We will now look at other major financial markets for debt, foreign exchange andderivatives and examine how these activities are split between exchanges and

OTC markets.

Early markets for foreign exchange were the prototype for OTC arrangements. Amarket was established at a location where buyers and sellers of currency couldapproach established dealers and search for the best available exchange rate.

Modern OTC markets rely on telephones and screens to link buyers and sellerswith the market dealers but the basics of the market remain the same. Dealersquote both bid and ask prices to prospective buyers and sellers. Dealers make aprofit from order flow, both directly from the bidask spread and also by

anticipating short-term price movements using their privileged access toinformation on orders. In doing so, the dealer is exposed to market risk from itsholding of an inventory of currencies.

In such OTC markets a key role in the transfer of risk is often played by theinter-dealer broker, perhaps better referred to as the dealers broker specialised firms where dealers may offload or purchase inventory. They, togetherwith the continuous process of search by buyers and sellers, are the mechanism

linking the market together.

Market makers also operate in exchanges, notably the specialists in the New

York Stock Exchange, but, as we will discuss later, almost all security exchangeshave found it more efficient to replace dealer market making with electronic orderbooks.

With the exception of some government bonds, debt is traded on OTC marketsrather than on exchanges. This is the case even when, as is usual in Europe,

bonds are listed on an exchange. Issuers find it worthwhile to have a listing,demonstrating that they have satisfied certain exchange rules about accountingand other disclosure standards, even when trading itself still takes place outsideof the exchange.

Drivers of Liquidity

The previous section shows that trading activity tends to concentrate in particularmarkets. Why is this so?

Historically, financial markets have developed in particular locations, for example,in the coffee shops and alleyways of Venice, London and Amsterdam. Many of theearliest financial markets were for exchange of coin. Early markets forgovernment bonds and shares operated in a similar fashion. The best prices and

most reliable contracting, for both buyers and sellers, could be found in theestablished trading locations with greatest trading volumes.

Liquidity the promise of the best pricing with the least search effort attracts

more buyers and sellers. The presence of many buyers and sellers generateshigher trading volumes which further narrows the gap between the prices forbuying and selling (the bidask spread). This virtuous circle of liquidity/tradingvolumes has been a driving force for the development of financial markets, both

in the distant past and in more recent years.

As we discuss in this chapter, there is considerable variety in the way markets areorganised, from formalised exchanges to informal OTC markets. There is alsogreat variety in the mechanics of trading. In some markets computer technologymatches buyers and sellers while in others human beings still bring togethermarket participants. Although the technology of financial markets is often verydifferent today from in the past, liquidity continues to be the primary driver of

market development. Thus, while there is a general trend towards greater use ofinformation technology to lower costs, a variety of different market arrangementscan still succeed in capturing liquidity.


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Automated trading systems are now common in both securities and derivativestrading. Outside of the USA the great majority of equity trading has now shifted

from dealer-based market making onto electronic order books, such as theLondon Stock Exchange SETS system. Although these automated matchingsystems operate very differently from dealer markets, they still result in the samekind of trade-off between pricing and liquidity. The amount of order flow placed

on the order book is the key factor in determining liquidity, just as normal market

size predicts liquidity in a dealer market. The greater the order flow, the morelikely it is that large trades can be transacted without adverse price impact.Conversely, for illiquid stocks with relatively little order flow, the gap between

limit-sell and limit-buy prices is usually comparatively large. Differences inliquidity can be especially pronounced when comparing individual securities.

Liquidity risk is also linked with perceived credit risk on individual securities.

Compare markets for otherwise similar securities with different degrees of creditrisk, for example BBB corporate bonds and AA corporate bonds. Credit risk isdifficult to assess and so securities with lower credit risk are seen as morehomogeneous and can be bought and sold more easily and in larger quantities

without a substantial price impact.

The relative lack of liquidity for lower rated bonds is reflected in credit spreads

over risk-free government bonds. Credit spreads on BBB bonds are much higherthan those on AA bonds, a difference that cannot be fully explained by the higherhistorical rates of default on BBB bonds. This difference in liquidity wasparticularly evident during the flight to quality in 1998 following the Russiandefault, when spreads on liquid exposures (AAA and AA bonds) narrowed while at

the same time spreads on BBB bonds widened substantially. This divergenceunderscores the importance of liquidity risk to a risk manager and ofunderstanding how the organisation of markets can affect liquidity risks.

There is also a close link between funding and liquidity, which has the tendency of

pushing trading activity and price formation from cash onto derivatives markets.This is apparent, for example, in the much greater depth and liquidity of theinterest-rate swap market compared to government bond markets. Taking a

position in interest-rate swaps involves no exchange of principal and, hence, no

funding beyond any initial margin. Taking an equivalent position in the cashmarkets would require a large amount of capital funding. For this reason, marketparticipants taking short-term positions almost always prefer to transact on the

derivative rather than the cash market, and so trading and liquidity and bestpricing all migrate onto the derivative interest-rate swap market (and otherexchange-traded fixed-income derivative markets).

A similar phenomenon can be observed in the greater liquidity of many creditderivatives relative to underlying corporate or sovereign securities. This liquidityadvantage is the reason for transacting on theoretically redundant derivativemarkets. Cash and derivative markets have a symbiotic relationship, with prices

moving closely together and any remaining discrepancy in pricing reflectingdifferences in liquidity and transactions costs.

Repo Markets

Liquidity can also be created through the removal of credit (counterparty) risk,most notably in money markets through the use of the sale and repurchaseagreement or repo. The repo is short-term contract in which one party agrees tosell a security (most often a high-quality bond such as a government bond or AAA

corporate bond) to another party (the lender) and then repurchase subsequentlyat a higher price. Any coupon or dividend payments are still paid to the originalowner, not the temporary purchaser of the security.


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In developed money markets repos can be conducted over the whole range ofmaturities, from overnight to many months. Because they significantly reduce

counterparty exposure, repos are the preferred form of transaction for manymoney market participants. They are employed by central banks to conduct theshort-term borrowing and lending (market operations) used to implementmonetary policy.

The reduction of counterparty risk and consequently lower interest-rate requiredon these transactions makes repos the preferred approach for corporateborrowers. Only if they are unable to pledge high-quality securities for repoborrowing will they undertake other forms of borrowing such as issuing

commercial paper, drawing down bank lines of credit or (in the case of financialinstitutions) interbank borrowing. Furthermore, there are a variety of repo andreverse repo transactions which vary with time, duration and the specific

collateral that is pledged (including stocks, bonds and commodities). Repofinancing offers an efficient vehicle for fund managers to finance their securities,thus enabling leverage.

The development of repo contracts has added to the liquidity of money markets

and, by making it easier to short-sell securities, also has encouraged the closerintegration of cash and derivatives markets. Indeed, repos play a crucial role in

the pricing of all fixed-income derivatives.For example, in pricing a total return swap or credit default swap, traders ordealers will have to hedge these positions. Financing of these hedges invariablyinvolves repos. If a dealer sells a credit default swap, a hedge could involve theshorting of the corporate bond which would be financed through a reverse repo.

Futures prices on fixed-income securities depend critically on repos.2 The repo ishence a valuable tool for the risk manager and, through increasing liquidity, hasalso had a beneficial impact on financial markets as a whole.

Liquidity and Financial Risk Management

This section discusses the management of liquidity risks in different markets.Before doing this it is helpful to think more carefully about the nature of liquidity.There are many definitions we all know what liquidity is yet we find it

surprisingly hard to define it. Perhaps the best definition comes from Nobel prizewinner James Tobin. Liquidity is defined by the ability to sell or buy a commodityor service at fair market value. If you are selling your house, then it might takemonths for you to sell at fair market value if there is a lack of buyers. If you

need sell it instantly, you might have to reduce the price in order to do so. Thisadverse price impact results from the illiquidity of the housing market.

For a risk manager a major concern is the possibility of a sharp drop in the

volume of order flow and hence in market liquidity. Unfortunately, such adislocation in liquidity often results when unexpected information reaches themarket and coincides with an increase in the volatility of market prices. For therisk manager this has important consequences for hedging. In addition,

traditional value-at-risk estimates may understate the true risk of loss, especiallyin cases where large inventories (relative to normal market size) are held.

Finally, risk managers need to be aware that the ability to buy and sell at a fairmarket price can sometimes almost entirely disappear; because of the intimatelinks between cash and derivatives markets, this can have widespread impactsacross the financial system. During the crises of both 1987 and 1998, it becamedifficult or even impossible to transact on many key markets. In 1987 both

trading capacity and systems for posting margins in equity future markets wereoverwhelmed by the dramatic fall of equity prices, resulting in the effective

2 See for example, Choudhry, pp 331-408 for an extensive analysis of the implied repo rate.


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closure of the derivative market and a consequent massive loss of liquidity on thecash equity market. In 1998 the massive positions taken by LTCM, and by other

traders imitating their strategies, became totally illiquid as credit and liquidityspreads widened in the wake of the Russian default. The result was a collapse ofliquidity in all but the most standardised products.

Exchanges versus OTC Markets

Why are some contracts traded on exchanges and others in less formal OTCmarkets? Financial exchanges offer their members a bundle of related services:3

1. Setting standards for traded financial products2. Providing price information3. Protecting against the risk of an agreement not being fulfilled

(counterparty risk)

4. Facilitating the matching of buyers with sellers at agreed pricesWe now discuss the first three of these services and how they also are supplied inOTC markets. We leave discussion of the matching of buyers with sellers until thefollowing section on technological change.

In order for a company to list on a security exchange such as the New York StockExchange, the London Stock Exchange, or the Deutsche Brse, it must satisfyadditional requirements over and above those of general company law. Accountsmust be prepared according to specified standards and released at specifiedfrequency (for larger companies quarterly statements are now usually required).Companies are also required to make public any significant information affectingthe prices of their securities. All this gives greater confidence to the purchaser ofa listed equity that the characteristics of the share are well understood and that

there will be a ready market should there be a need to sell the share. Exchangerules also govern the market for corporate acquisitions, imposing rules for theannouncement of bids and the conduct of a contested acquisition.

The provision of price information is a major source of exchange revenues. A live

feed of the current trading prices is a valued trading resource; hence, financial

institutions and independent traders are prepared to pay substantial charges forlive price feeds. Delayed feeds of 15 minutes or so are of little value to

traders and can be obtained for free from websites and other sources. Tradingprices are also needed, for example, by asset managers or hedge funds as acheck that they are obtaining best execution from their brokers.

Price information on OTC markets emerges from the process of comparing quotes

from several competing dealers. Provided the market is liquid, it is not difficult toobtain this information. Foreign exchange markets provide a good illustration ofsituations where there is such a high level of competition that quotes fromdifferent dealers differ by only very small amounts and a single market priceemerges. The market for interest-rate swaps is similarly highly liquid. Indeed, soliquid is this market that the interest-rate yield curve emerging from swaptransactions is regarded as a much more accurate measure of market interest

rates than the relatively illiquid government bond curve. Government bonds areusually only traded actively fairly close to the time of issue. Hence the interest-rate swap market, where all maturities are traded actively all the time, hasbecome the benchmark for interest-rate measurement.

Protection against counterparty risk is of particular importance in derivativecontracts, which can be in force for several months or even years before they arefinally settled. In contrast, the contract for the sale of a security is typically

3 See Lee (1998) for a detailed survey of the function and governance of exchanges.


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settled within 3 days. Derivative exchanges deal with this through the device ofthe clearing house, which becomes the counterparty to all derivative trades onthe exchange, and imposes margin requirements on participants based on theirnet position vis--vis the clearing house.

The question then arises, when will market participants choose to transact on anexchange and when will they choose an OTC market? In order to attract

participation the major OTC markets have to have their own arrangements todeal with counterparty risk. Participating market-makers generally have thehighest-quality credit; only well-known financial institutions with credit ratings ofAA or better are able to attract significant amounts of business. As a result,

trading is possible without the same degree of netting or margining that is appliedto exchange-traded derivatives.

This is well illustrated in forward foreign exchange where there are sufficient high

credit quality participants that the OTC market has no difficulty providing thesame control of counterparty risk and much greater liquidity than the competingexchange-traded contracts. As a result, the volume of trades in OTC currencyforwards dwarfs the liquidity of exchange-traded currency futures. The quality of

entrants and size of transactions is different. There is no need for the same levelof margining or other techniques to control counterparty risk, since the barrier to

entry (the credit standing required to be successful in attracting business) acts inplace of margining.

OTC markets have developed their own procedures for obtaining contractualcertainty and reducing counterparty risk. The International Swaps and DerivativesAssociation (ISDA) has developed a number of master contracts covering a wide

range of OTC derivatives. These master contracts allow for greater flexibility thananything traded on a derivatives exchange; buyers and sellers are free to alterspecific aspects of the contract to meet their own requirements. ISDA masteragreements also support bilateral netting arrangements that act to reduce

counterparty exposures.

Another key issue in the choice between exchange and OTC market is the trade-off between tailor-made solutions and basis risk. Exchanges provide liquidity in a

few standardised contracts but such contracts may not be appropriate for hedging

purposes. This is because small differences in maturity or other contractualdetails can lead to an unacceptable mismatch between the hedge and the positionbeing hedged (basis risk). Much of the demand for interest-rate swaps arises

because they can be tailored exactly to the hedging requirements of theparticipant, for example when replicating a structured interest-rate product. Thisis the key reason why interest-rate swaps are an OTC rather than an exchange-

traded product.

Post-trade Processing

After a trade is executed further steps are required to complete the transaction.Nowadays, with increasing competition in trading spaces and consequent

reduction in bidask spreads, it is often such post-trade processing that createsthe largest part of the cost of trading.

We can begin with the example of a securities trade, such as a bond or stock.After a deal is struck, three further steps are then undertaken:

Comparison and confirmation. Before the trade can be processed further it isnecessary to conduct both comparison (does the information recorded by bothparties to the trade agree?) and confirmation (is this what the investor really

intended?). Following the trade, buyer and seller exchange messages confirmingboth their agreement to trade and all the details of the trade (security orcontract, quantity, price, arrangements for settlement, etc.) and a broker needs


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to obtain positive confirmation from the investor (sometimes referred to asaffirmation) that the trade complies with the original order.

Netting. A considerable reduction in the value and volume of securities trades forsettlement can be achieved by netting offsetting cash and security flows. This isusually undertaken through a central counterparty (discussed further below).Netting allows a partys commitments to be reduced to a single daily payment

and single net figure for the acquisition of each security.Settlement.The positioning of securities and the arrangement of payment occurprior to settlement. Settlement involves the final transfer of ownership ofsecurities (delivery) in exchange for corresponding payments.

These steps take place sequentially. In most major financial centres mostsecurities trades are processed on a T+3 basis, with matching and netting oftrades completed by the end of T+1 (i.e., one day after the date of trade),

preparation for settlement during T+2, and final settlement on T+3. Nowadays inall leading centres settlement is delivery versus payment (known as DVP),removing any risk of the loss of principal through counterparty default.

Operational problems in trading are often associated with post-trade processing.

Trading failures are much more common when manual processing is required,

with the attendant risk of human error. Fortunately, such operational events tendto occur independently. Failures in post-trade processing may be higher thandesired, but there is a good deal of diversification over time, average losses arepredictable, and with improvements in procedures and reporting the level oflosses can be reduced.

The goal nowadays for many back-office processes is to achieve straight-through

processing, that is, for all the details of post-trade processing to be input instandard form (referred to as standard settlement instructions) at the time thetrade takes place; and then for all subsequent post-trade processing to take placewithout manual intervention. The great advantage of straight-through processing

is the major reduction in operational risks and the high costs of manualprocessing.

Retail and Wholesale Brokerage

Not everyone can deal directly on financial markets. Exchange trading is limitedto members always established professional firms. OTC markets have their ownlimits on participation: generally only AA-rated firms are accepted ascounterparties only certain minimum sizes of deal are acceptable, and only

regular participants who have established their identities with dealers and knowthe specific trading conventions for that market are able to trade freely.

Effectively this means that smaller deals, retail trades, cannot be handleddirectly on the market. Someone a retail broker or other secondary originator has to collect together a number of retail orders and be responsible for passingthem through onto the exchange or to an OTC dealer.

Financial firms with direct access to the financial markets can therefore makeadditional revenue by acting as brokers, that is, taking and executing orders onbehalf of customers who cannot themselves deal directly on the market. (In fieldssuch as insurance, brokerage also is used to refer to the matching of buyers withsellers, but the mechanism is the same in this case there are sellers who do notdeal directly with small clients, and so a broker is needed to bring themtogether.) Brokerage has in the past been a highly profitable activity for

investment banks and other financial institutions, using their privilegedmembership of exchanges or their established position in OTC markets to turn asubstantial profit. Profit margins were exceptionally large for retail customers.


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They can still be high for customers who are naive enough to walk into a high-street bank to make a modest trade in a share or bond, and are charged a

considerably greater fee than is imposed by the exchange where the deal takesplace. Over recent years, however, falling costs of information technology haveallowed many newcomers to act as brokers and margins have fallen dramatically.

What we have described so far is the low-risk activity of retail brokerage,

handling orders that are too small, or come from insufficiently creditworthycustomers, to be placed directly onto the market. Many of our comments aboutoperational risks and operational costs in post-trade processing apply also toretail brokerage. In the past there have been high levels of operational costs,

such as repudiated orders, but such costs have been fairly predictable and theapplication of information technology is greatly reducing such problems.

There is another important and distinct brokerage activity known as wholesale

broking, which means handling orders that are too large to be placed directly onthe market and breaking them up and splitting them between buyers. Wholesalebroking of this kind is carried out both by investment banks and by a number ofsmall specialised wholesale brokerage firms. These firms take little direct credit

risk but potentially huge operational risks due to the large value of deals thatthey handle on behalf of clients.

Nowadays a large proportion of securities and derivatives trading is driven byhedge funds. The bigger hedge funds are often in the position of placing ordersthat are too large to be placed directly onto the market. Therefore, for thesefunds a critical relationship is with their primary broker who will handle all aspectsof trade execution, passing on orders and dividing them amongst different

brokers for execution, as well as providing the entire range of post-tradereporting and analysis services. Primary brokers are also major secured lendershedge funds (making use of the repo contract described earlier). The primarybroker to a hedge fund is always one of the major investment banks.

New Financial Markets

This chapter has compared the activities on the principal securities and derivativemarkets. An analysis of the structure of financial markets would, however, be

incomplete without a discussion of the rapid development of new markets overthe past decade, especially markets for structured products.

Much of the trading of interest-rate swaps is related to their use for the creationof structured notes and in structured finance. Structured notes are OTC interest

products customised to client specifications. Structured notes are extraordinarilyflexible; they can be created with virtually any conceivable interest-rate profile,based on both floating and fixed rates, domestic and foreign currency. One well-

known example is the inverse floating-rate note, where the return varies in theopposite direction to LIBOR interest rates. If LIBOR increases by 100 basis points,the interest paid on this product declines by 100 basis points.

Another important structured financial product is the asset-backed security,

collateralized either by mortgages (the MBS) or other bank loan assets (the ABS).These instruments were pioneered in the US in the 1980s, with the developmentof tranched mortgage backed securities. In these products a trust or specialpurpose vehicle (SPV) is set up to hold mortgages transferred off a banksbalance sheet. The SPV issues debt obligations referred to as tranches, rangingfrom the most senior tranches -- which have first claim on the cash-flows fromthe underlying assets -- to the most junior.

The most recent development in the field of structured finance, which has usedmany of the techniques of asset backed securitisation, is the explosive growth ofcollateralised debt obligations or CDOs. This is a broad term used to refer to awide range of new structured financial products other than the traditional ABS or


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MBS. CDOs have allowed corporate loans or bond obligations to be securitised,either by directly securitising corporate loans or bonds (the cash-flow CDO) or

using credit default swaps to create a security which synthetically replicates thesecash flows (the synthetic CDO). CDOs are also issued using ABS or MBS ascollateral.

Another interesting area has been the secondary loan trading market, which

again has grown significantly. It enables banks that are unable to participate insyndications to buy loan assets and allows banks that are over-concentrated toreduce their exposure. An important driver of this new market was theintroduction of the euro, which supports a large and liquid market in euro-

denominated credits. This could not have been supported in, say, Deutschmarksor French francs alone, and the syndicated loan market has grown especiallyrapidly in Europe.

The major impact of securitisation, together with secondary loan trading, is quiterevolutionary. Traditionally the business model of commercial banks was to takedeposits and to lend and hold both these assets and liabilities on balance sheet.Today we are in a very different environment, with the huge growth of

securitisations (including CDOs) enabling banks to package their loans and sellthem as securities. Retail lending has for some time been transferred off-balance

sheet. The biggest example of this is the market for US mortgage-backedsecurities (guaranteed by Ginnie Mae and Freddie Mac) which is bigger and oftenmore liquid than the US government bond market. Now corporate loans are alsono longer a long-dated buy and hold instrument; as the CDO and secondary loanmarkets expand, corporate bank debt is becoming an increasingly liquid asset.

A third closely related development has been the growth of the credit derivativemarket, including credit default swaps that enable banks to insure againstdefaults. A critical feature of the credit default swap, unlike a credit insurancecontract, is that there is no requirement that the purchaser of protection hold the

underlying insured assets. In the even of default event the default swaps can besettled either by transfer of the physical asset or by payment of a cash difference,based on a post-default market price of the insured asset. The rapid growth of

the credit derivatives market has, however, concerned regulators, especially the

concentration of risk to a small number of major institutions providing most of thesold protection. While problems with the clearing and settlement of CDS tradeshave eased somewhat under regulatory pressure, these remain a lingering source

of concern.

These new markets create both opportunities and risks. We can expect thedevelopment of these new liquid markets for credit to improve the ability of risk

managers to control and respond to credit risk and to reduce the overall costs ofintermediation between savers and borrowers. At the same time, because thesemarkets are still relatively new, concerns remain about how well participantsunderstand the risks they are assuming. The possibility of mispricing and of

dramatic loss of liquidity is very real, as demonstrated by the subprime mortgagecrisis that began unfolding in 2007.

References

Allen, H, Hawkins, J, and Sato, S (2001) Electronic trading and its implications forfinancial systems. In S Sato and J Hawkins (eds), BIS Papers No. 7 ElectronicFinance: A New Perspective and Challenges (available via http://www.bis.org).

Choudhry M, (2002), The Repo Handbook, Butterworth Heinemann,

Domowitz, I, and Steil, B (2002) Innovation in equity trading systems: the impacton trading costs and the cost of equity capital. In B Steil, D G Victor and R RNelson (eds), Technological Innovation and Economic Performance. Princeton, NJ:Princeton University Press.


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Lawrence, C, and Robinson, G (1997) Liquidity, dynamic hedging derivatives andvalue at risk. In Risk Management for Financial Institutions: Advances inMeasurement and Control. London: Risk Books, pp. 6372.

Lee, R (1998) What is an Exchange?Oxford: Oxford University Press.

Steiner, R (1997) Mastering Repo Markets. London: FT Pitman.

Tavakoli, J M (2003) Collateralized Debt Obligations and Structured Finance. NewYork: Wiley

Weber, Bruce (2003) Adoption of electronic options trading at the IESE. IT Pro,July (available via http://www.london.edu/sim/Working_Papers/SIM22.pdf).

Young, P L (2004) The Battle of Chicago: Chicago after Eurex US. In TheHandbook of World Stock, Derivative and Commodity Exchanges 2004 (availablevia http://www.exchange-handbook.co.uk).

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