“He’s not here Reev.” said my assistant. “Head of trading wants to see you.”
Every day — unless the day was really slow, involved the risk department coming by and getting me to sign off on whatever positions they thought I may have had.
The source of truth was their printouts and my blotter. The blotter was always a mass of harried scribbles —I sold Bank X 500m ARI5’s at 101.125, BOT 100 TingYi @98 etc. etc.
The daily P&L takes getting used to, but over time it was meh, euphoric or deeply embarrassing.
The market is the great humiliator — sans doute.
It never occurred to me to hide trades. Yes, I might ‘pad’ a position with 1/2 a point, but I knew the truth would come out. Markets do not care about you. I understood and could manage risks and learned how to trade out of ‘bags’ —and, well, even if I couldn’t well there were other less stressful jobs.
My favorite ‘ancient’ on the desk always said “Reeev — Some days you're the pigeon, other days the statue”.
So back to the head of trading — he was in a bad mood. “What is going on at the converts desk!?” I had no idea. “How can we have such a loss?”
It was then that I realized my missing trader on the desk must have hidden something.
A few bad trades — unreported — until the Back-office caught up.
Why talk about this?
Blockchains are ‘sources of truth’. There is less opportunity to ‘play the float’ and try to trade out of a hole.
Similar to the risk reports and blotters — If a blockchain cannot reach consensus on the truth, it puts at risk everything else.
My trading days are over, but it stuns me that we can still have trades, loans, swaps etc. all stored on some ‘secure’ server and serviced by only a few administrative people. The truth might be securely stored — but unavailable to many with exposure (especially those who do not know. Shareholders, others?).
These opacity risks make capital expensive and have demonstrated bad externalities.
The opacity of a bank has not changed since Barings or Lehman brothers.
If we can agree that blockchains are a superior source of truth for some things, then we can see that developing protocols to put more things on-chain reduces unknown risks.
Which brings me to web3, and an idea called triple entry accounting. This idea has been around since the start of bitcoin. I read about it and thought what a great way to track obligations.
Triple entry accounting belongs on a blockchain. I credit myself versus you in a token or contract. You acknowledge this debt. Payment goes wallet to wallet and the token is marked as paid.
I mint an ‘I owe you’ for 100 Daimler 4.25’s @125.75 NFT — on a blockchain for my Back office and my counterparty to see. (Not to mention report the trade easily to the regulator). I pay it within settlement — basta. Heck, the prime brokerage might be able to better finance my nutty trades?!??!
It means one set of books between creditor and debtor and a final process (p2p payment) to resolution.
The blotter is a series or ‘i owe you’ for that bond and ‘you owe me’ for another bond. Parties could see the source of truth (close to real time). Each would be able to reject, rescind or trigger payment and the Back office would have only to manage the prime brokerage / treasury.
And head of trading would not need to ‘rip my head off’ after a bad Friday.
The effects of web3 on credit in markets will be profound. Buyer for choice.