Margin rules gave clearing firms new power to rein in unhedged traders

Evidence

The shit-sellers cannot trade the way they used to. Either their capital requirement will be higher than it was or the clearing firm will pay more margin to [the Clearing Corporation] than they used to… . The exchanges … wanted better risk management tools than the old systems had allowed but they didn’t want to kill the market either… . [The new systems] gave them [the clearing firms] ammunition to rein in traders that they were always nervous about. The problem before was … if you sat on a guy too hard he’d go somewhere else [to a different clearer]. And you can make a lot of nice money in two or three years when there’s not a crash. And a lot of nice fees for the clearing firm. [But] when there’s a kind of new minimum floor … you can be tough on a guy and he can’t go somewhere else and get a hugely better deal. (Hinkes interview 1) These centralized, formal risk controls help reinforce an informal cultural understanding, still strongly held by older traders and risk managers who had “that experience of being in a hurricane” in 1987 (Power interview), of the dangers of low-strike-price puts. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 171

Categorization

• DEEPTHINKING: The political economy of the margin floor: a technical ‘risk management’ instrument quietly redistributes power between clearing firms and their own traders, solving a principal/agent problem the old competitive market structure couldn’t. Financial infrastructure as governance.