The Economist – Over the Counter, Out of Sight

By | November 12, 2009

Indeed, commercial banks in America have pocketed $115 billion from cash and derivatives trading in the past ten years, according to the Office of the Comptroller of the Currency, a regulator. “Banks lump their trading revenue together but the significant majority of it comes from derivatives,” says Kevin McPartland of TABB Group, a research firm.

A simple OTC contract with an obscure maturity date is easy to value and margin. But it would not elicit enough interest from buyers or sellers to justify listing on an exchange. And OTC derivative trades are usually big. On an exchange, a single order could move the market price, creating uncertainty for traders. Mr McPartland likens this to buying a book on Amazon instead of eBay: you often pay more at Amazon, but at least you know the price in advance.

http://www.economist.com/displaystory.cfm?story_id=14843667

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