Settlement Risk

  

Categories: Banking, Insurance, Trading

You've sold a bond to a buyer who came to you through Goldman Sachs. Is there risk that the buyer, paying $50 million for that bond you'd owned for 7 years, and which has 13 years left to maturity...will disappear? Not settle? Not pay? Sure, there's risk. Small, but it's out there.

This throw-away issue became a real one in the crisis of 2008/09, when there was no liquidity anywhere in the markets, meaning that a lot of transactions didn't really complete or settle. That is, the buyer went bust between the time they'd committed to buy...and when the actual wire transfer of the cash was due.

Can happen. Caveat Emptor.

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a bid and ask price under a market maker structure of trading securities. no more

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wire hangers, a plastic hanger company is publicly traded on an exchange like

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Nasdaq where buyers bid for a price to purchase and sellers ask for a price to [Nasdaq wall shown]

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trade. no more wire hangers is bid this moment at 37:23 a share by buyers

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price of 37.31. note the eight cents a shared difference in the share prices.

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that dif is the spread between the two prices, and it's worth noting that in [bread is buttered]

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extremely volatile stocks, the spread widens. and in boring highly liquid

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stocks which don't move much, the spread tightens or is narrower. that is on a

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volatile equivalent of no more wire hangers the spread might grow to 20 or

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30 cents a share whereas a boring name that pays a big dividend and the stock

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well that spread might be just three or four cents. so why grow? well because a

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market maker in a volatile stock doesn't want to be caught losing money on her

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inventory. if no more wire hangers suddenly gapped down to 37.10 a share [equation shown]

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well it would be likely less than the average of what the market maker paid

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for her quote "inventory" unquote in that stock from which he was making a market

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in it. each time the shares trade the market makers dip into that spread to [woman dips cracker in butter]

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pay their bills and allow them to keep doing business. so that's spread. and it's

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