A disappearing act

Lao Tzu was such a wise man that, according to Chinese lore, he was born with white hair and a white beard. We are in no position to confirm this, but a very well-known saying of his is totally apt for the current condition of the stock market: «Silence is golden. Those who know do not speak and those who speak do not know.» This is exactly what is happening in financial markets, especially the derivatives market, which, geared as it is to involve the experts, does not become a political issue as the stock market does. It is absolutely certain, however, that the Athens Stock Exchange’s plunge, bigger than anything seen in the «mature» markets, is due to the strange non-intervention of the derivatives market. It seems incredible but during the ASE’s dive, banks and other financial institutions which play the role of market makers shirked from fulfilling their mission. Clearly embarrassed, they failed to guide the market. They forgot that this is the job they are paid to do, that is, to balance demand and supply and smooth out a market’s rise or fall. They failed to attenuate the fall because they were not in the mood to undertake risks. Being unable to hedge their positions in the derivatives market, investors did what they had to do to minimize risk: They massively sold shares. Thus, we experience the, paradoxical but true, development of a lack of derivatives to accelerate the decline of stocks. It is worth searching for the causes of this phenomenon: They lie in our shallow derivatives market. Market makers cannot find enough shares available for borrowing and are thus unable to provide prices to the market. Perhaps this is true but it is no excuse for the virtual disappearance of the derivatives market.

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