Saturday, July 26, 2008

It's been awhile...

So, it turns out I've been pretty bad at posting over the last few months. I've had things to keep me busy: one of my actuarial exams, work, RL moving, vacation, getting engaged, etc., so it's not like I'm short on excuses. Nevertheless, I think I should try to post and keep updating this thing periodically.

It seems like interest has waned in the market. I'm not entirely surprised, as most of the markets are rocked by scandal after scandal. New money coming in is kind of rare, as it seems that those who are involved with the markets currently are the only ones who would like to be involved. The lack of liquidity also frightens new investors, as the market value of securities is significantly more than the liquidation value (that is, if you sold all your shares as fast as you could) for almost every security, and even for modest amounts of shares.

For example, take SLR, the company I'm CFO for. (This is in no way a critique of my shareholders, but if I'm going to pick on a company, I might as well hit home.) Suppose I owned 10,000 shares of SLR right now. The market price shown on CapEx is L$6,500. However, if I actually tried to sell all 10,000 shares, I would receive (after commission) L$5,153.02, which is 79.3% of the displayed price. Make it 50,000 shares and I would only receive 12.9% of my displayed market value!!! And we're not talking vast sums of money here - 50,000 SLR shares at market is worth about $120 USD. Enough to care, but not enough to break most of us financially.

You can play this game with almost any stock on any market. There are exceptions, where management has taken care to set aside cash reserves to prevent this from happening, but by and large putting money into the market means you will need to take your time getting money out of the market.

I've heard the idea of market makers being tossed around before. For those of you who don't know, a market maker is a person/firm that makes money off the bid-ask spread in the market. They provide liquidity. However, from my previous actuarial exam (which I passed, by the way!), Modeling Financial Economics, market makers need options in order to protect themselves. There are techniques whereby market makers can insure themselves against large price changes, or even set themselves up to make money if the market doesn't move. However, these require options, which no exchange in SL has been willing to set up yet.

If any exchange in SL is seriously interested in setting up options and market making and similar techniques, please contact me. While I'm sure I'm not the only person in SL who understands how to make it work, I'm likely one of the few, and I would love to help.

I suppose the question is this: How do we revitalize the markets now? I think liquidity is the major issue, but I would like to hear what others think as well.

2 comments:

Anonymous said...

I can't say I honestly understand options entirely but it would be nice to have although I'm still waiting on any exchanges to implement shorting which I've wanted as a feature for quite some time now.

Guardian Market said...

Yeah, I would have thought at least one of them would have implemented that by now. However, I think it would require a capital reserve, which may be hard to implement.

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