During the last decade, financial derivative users are operating in an increasingly saturated product market. Consequently, futures exchanges are gradually shifting their endeavour from financial innovation to trading innovation as their main growth channel. The pursue of technology is evident in the sophisticated electronic trading platforms established by prominent derivative exchanges, including the CME’s Globex 2, HKEx’s HKATP, SFE’s SYCOM IV and LIFFE-Connect. However, the motivation for setting up an ETP goes beyond better cost efficiency, faster information dissemination and lower trading error ratios as put forth by advocates of screen trading systems.
X"or most of us, the task of beating the market is not difficult, it is the job of beating ourselves that proves to be overwhelming. In this sense, "beating our-selves" means mastering our emotions and attempting to think independently, as well as not being swayed by those around us. Decisions based on our natural instincts invariably turn out to be the wrong course of action. All of us are comfortable buying stocks when prices are high and rising and selling when they are declining, but we need to develop an attitude that encourages us to do the opposite.
Success based on an emotional response to market conditions is the result of chance, and chance does not help us attain consistent results. Objectivity is not easy to achieve because all humans are subject to the vagaries of fear, greed, pride of opinion, and all the other excitable states that prevent rational judgment. We can read books on various approaches to the market until our eyes are red and we can attend seminars given by experts, gurus, or anyone else who might promise us instant gratification, but all the market knowledge in the world will be useless without the ability to put this knowledge into action by mastering our emotions. We spend too much time trying to beat the market and too little time trying to overcome our frailties.
According to the modern theory of financial intermediation, an important role of banks in the economy is to create liquidity by funding illiquid loans with liquid demand deposits (e.g. Diamond 1984, Ramakrishnan and Thakor 1984). More generally, banks create liquidity on the balance sheet by transforming less liquid assets into more liquid liabilities. Kashyap, Rajan, and Stein (2002) suggest that banks may also create significant liquidity off the balance sheet through loan commitments and similar claims to liquid funds.
Despite the importance of bank liquidity creation, we are not aware of any comprehensive empirical measurement of liquidity creation by the banking industry. There are no measures to our knowledge that incorporate all the on- and off-balance sheet activities of banks. Moreover, studies of research and policy issues in banking typically focus only on some components of liquidity creation, such as bank loans, which may yield incomplete results.
