PrefBlog

To my mind, one of the more fascinating fields of research in the financial sector is market design. I’ve posted about Pegged Orders, proposed regulation of the retail bond market and the BoC’s analysis of bond auction formats, among others. So I was highly entertained – and educated! – by a piece on VoxEU by Trevon D. Logan, Information and Illegal Market Mechanisms:

This column studies the online (illegal) market for male sex work. It shows that participants find ways to get the prices right, even in the absence of formal enforcement mechanisms, using technology to share and disseminate information. The risk of fraud is disciplined by client reviews and demand for photos in escorts’ advertisements.
…
While previous empirical work has looked at how information technology improves market functions (Brown and Goolsbee 2002, Jensen 2007, Lewis 2009, Goyal 2008), we provide the first evidence that an illegal online market is just as responsive to information as a legal online market. We believe that this work suggest that, irrespective of the institutions involved, market participants find ways to get the prices right if they have access to technology that allows them to share and disseminate information even in the absence of formal enforcement. Even in markets with formal contracts and enforcement, the types of forums created by the clients of male sex workers are common (e.g., AngiesList.com). In this illegal market, we found that the participants are quite good at policing the market themselves. This informal policing, we believe, is critical to the functioning of this market. While formal institutions in general are undoubtedly important, large economic gains could be made in short order by allowing market participants better access to technology and information, allowing participants to share information and police themselves until formal institutions are well developed enough for contracts to be formalised and enforced.

Speaking of market structure, it is my understanding that there is at least one discount brokerage that will process iceberg orders for retail – not on-line, but when you speak to a “trader” anyway. Where there’s one, there’s probably more … if anybody wants to do the legwork for a survey of discount brokerages, I’ll publish it with credit.

PerpetualDiscounts experienced an interuption of their run-up today and Fixed-Resets were able to catch up a little in performance following a very good month – and Month-to-Date – for the market in general, amidst continued heavy volume. PerpetualDiscounts now yield 6.60%, equivalent to 9.24% interest at the standard equivalency factor of 1.4x. Long Corporates are on a tear as well, returning 2.13% month-to-date (6.68% year-to-date) and now yield about 7.2-7.3%, meaning the the pre-tax interest-equivalent spread is now about 194-204bp … it hasn’t been that low for a while!

This entry was posted on Wednesday, May 6th, 2009 at 6:56 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.