The darker side of share market

Dr R Balashankar

Dark Markets: Asset Pricing and Information Transmission in Over-The-Counter Markets, Darrell Duffie, Princeton University Press,  Pp 95(HB), $ 35.00

OVER-The-Counter markets is one of the most risky, opaque financial operations. It played a significant role in the global financial crisis. In the OTC, the transactions are done over the phone or across the table verbally, not using the regular market mechanisms, registered processes. Dark Markets: Asset Pricing and Information Transmission in Over-The-Counter Markets by Darrell Duffie looks at this phenomena from an insider point of view.

“Some OTC markets have special intermediaries known as brokers that assist in negotiations between buyers and sellers, conveying the terms of one investor to another, usually without revealing the identities of the counter-parties to each other. As opposed to dealers, a broker need not trade on its own account.”
The picture Duffie draws of this dark market makes for scary reading. Millions of dollars changed hands in a matter of seconds, without any official record. “Some of the lack of transparency of OTC markets is inherent in the nature of the underlying products. For example, a wide range of collateralized debt obligations and other structured credit products are thinly traded and have complex contractual features that could be analyzed well by only a narrow range of specialized investors.”

Dealers have a vested interest in maintaining trade in OTC markets, the author says, because profitability is enhanced by the opaqueness. Duffie explains the working of the market in detail, how investors, if not careful, stand to lose while a smart operator can literally mint money. Even people who deal in regular markets indulge in OTC. Tables, formulas and charts add weight to the book.

Extremely informative and revealing, the book leads readers to a world of dark corners of the financial market. Those who dabble in the market should definitely read it for understanding the pitfalls and those who don’t must read it for the satisfaction of knowing what they have not missed. Either way it is a valuable read. A little heavy, may be with all those figures and theories and formulas, but the book is worth the read.
(Princeton University Press, 41, William Street, Princeton, New Jersey 08540)