5 ms·

>"The decision to clear client trades will be made on a case-by-case basis, the person said." Could someone say what "clearing the trades" mean here?

curiousgal 9y ago
Clearing the trades means both buying and selling.
- bogomipz 9y ago
  So they are the market maker?
  - workthrowaway27 9y ago
    No, they just serve as a central point to match buyers and sellers so the buyers and sellers don't have to find each other themselves. They aren't making a market but they do get clearing fees.
  - tedunangst 9y ago
    More like match maker.
  - cm2187 9y ago
    No more like a broker. When you buy stocks through your broker, all the broker does is to pass on your order to the exchange, and to report when it was executed. The broker doesn’t take any risk, other than you not making a payment after you gave the buy order. If the broker was a market maker, he would keep an inventory of that stock and your order would be filled by the broker directly. Who would then report and clear the transaction on the exchange.
  - vostok 9y ago
    Clearing doesn't mean buying and selling. There's not really a great analogy, but the idea is that Goldman is on the hook if one of their customers can't maintain the margin/haircut.
riazrizvi 9y ago
It's where Goldman would net off trades between their own clients, effectively acting as an exchange for their clients using the prices on the official exchange. They say in the article they won't act as market-makers or hold their own positions. That means they won't perform their usual capacity for clients, where they act as middleman between the exchange and their own clients. ie they won't make a price for their clients to buy a bitcoin future the client wants to sell, and then turn around and sell the bitcoin to someone else the exchange later in the day. They won't do that. What the will do is buy the bitcoin future if they have another client that wants to buy it at the same time, because then they will never assume much risk.
- dailyvijeos 9y ago
  It’s smart because holding BTC in a Tulip-bulb crisis is insanely risky. This current crisis is due to elastic demand based on short-lived, fashionable attention of a tiny currency, whereas common currencies are more inelastic because their usage and scale lends themselves to more stability. The value will collapse when people lose interest or when large institutions get over the mania of New Relationship Energy. Durable, appreciating assets that are easily liquidated are ideal for holding balance sheet value. For transactions, BTC maybe fine but even that is risky. It will be interesting to see if shorting will be possible.
  - sdljfslkjfdsj 9y ago
    I can't see shorting it outright without being wheeled out on a stretcher. Options will be the best play to safely express a bearish position with asymmetric risk/reward assuming they aren't priced to insanely due to IV. Still at least you know your risk.
    - deleted 9y ago
      [deleted]
    - lallysingh 9y ago
      Just use a stop order:https://support.gdax.com/customer/portal/articles/2426596 https://support.gdax.com/customer/portal/articles/2426596 There will be some slippage, but it'll be relatively bound.
dia80 9y ago
It means they will allow their account at the exchange to settle client trades. This will involve them using their existing collateral at the exchange to underwrite the client trades. They will in turn demand collateral from the client but may be potentially exposed if the client defaults.
olalonde 9y ago
Why don't their clients trade directly on the exchange? What value does GS provide here?
- dragonwriter 9y ago
  > Why don't their clients trade directly on the exchange? Because to do that with funds in a GS account that you use for trading other things, you have to take the money out, which adds friction?
- vostok 9y ago
  You still need to clear the trades even if you directly trade on the exchange. It's just not worth the expense for the vast majority of customers to maintain clearing memberships for every single product at every single clearing house.
osrec 9y ago
Clearing is all about novation. This basically means that the buyer and seller don't see each other as counterparties, but only see Goldman as the "middle-man" counterparty. It's a method of reducing counterparty risk, as both parties end up transacting with a credible institution, rather than directly with each other. This also means that the central clearing counterparty takes on counterparty risk, and that's pretty much what the clearing fees are paid to them for.
- osrec 9y ago
  As a footnote, I'm not sure how Goldman are going to novate the transactions - as in, will they actually issue 2 transactions on the blockchain?! I don't see a real need for that, given that the blockchain protects against such risks to a large extent. Maybe their definition of clearing for bitcoin is different to that for standard derivatives, in which case they will probably just help their non techy clients (i.e. many of the hedge funds in Mayfair and Manhattan) execute bitcoin transactions.
  - tlrobinson 9y ago
    I believed the futures are “cash settled”, basically betting on the price of Bitcoin on other exchanges, not real Bitcoins.
- vostok 9y ago
  I'm not an expert on the nitty-gritty details of back office stuff, but typically novation comes into play when you're dealing with swaps. These are centrally cleared futures so you're not facing the person on the other side of the trade.
jpmattia 9y ago
I think there is something of term-of-art here. "Clearing brokers" (like Goldman) vet the clients who send transactions to the exchange. If the client defaults on a trade, Goldman is likely liable to the clearing house for the default amount, so it is in their interest to clear only those clients with sufficient collateral to provide margin. Note that a clearing broker is different from a clearing house. The clearing house serves as a back end settlement layer to an exchange, which serves as a front-end matching engine. https://www.investopedia.com/terms/c/clearingbroker.asp https://www.investopedia.com/terms/c/clearingbroker.asp Edit: There must be a bona fide finance guy here on HN to answer this knowledgably?
- vostok 9y ago
  This is the correct answer and only one of two correct answers at the moment. Aside from the difference between the clearinghouse and the clearing broker, the difference between the executing broker and the clearing broker is also interesting. For example you might have bank A as your executing broker and they give up the trade to bank B which is your clearing broker. You might even have your own exchange membership and bank B clears the trade for you.

curiousgal 9y ago

Clearing the trades means both buying and selling.

bogomipz 9y ago
So they are the market maker?
- workthrowaway27 9y ago
  No, they just serve as a central point to match buyers and sellers so the buyers and sellers don't have to find each other themselves. They aren't making a market but they do get clearing fees.
- tedunangst 9y ago
  More like match maker.
- cm2187 9y ago
  No more like a broker. When you buy stocks through your broker, all the broker does is to pass on your order to the exchange, and to report when it was executed. The broker doesn’t take any risk, other than you not making a payment after you gave the buy order. If the broker was a market maker, he would keep an inventory of that stock and your order would be filled by the broker directly. Who would then report and clear the transaction on the exchange.
- vostok 9y ago
  Clearing doesn't mean buying and selling. There's not really a great analogy, but the idea is that Goldman is on the hook if one of their customers can't maintain the margin/haircut.

riazrizvi 9y ago

It's where Goldman would net off trades between their own clients, effectively acting as an exchange for their clients using the prices on the official exchange. They say in the article they won't act as market-makers or hold their own positions. That means they won't perform their usual capacity for clients, where they act as middleman between the exchange and their own clients. ie they won't make a price for their clients to buy a bitcoin future the client wants to sell, and then turn around and sell the bitcoin to someone else the exchange later in the day. They won't do that. What the will do is buy the bitcoin future if they have another client that wants to buy it at the same time, because then they will never assume much risk.

dailyvijeos 9y ago
It’s smart because holding BTC in a Tulip-bulb crisis is insanely risky. This current crisis is due to elastic demand based on short-lived, fashionable attention of a tiny currency, whereas common currencies are more inelastic because their usage and scale lends themselves to more stability. The value will collapse when people lose interest or when large institutions get over the mania of New Relationship Energy. Durable, appreciating assets that are easily liquidated are ideal for holding balance sheet value. For transactions, BTC maybe fine but even that is risky. It will be interesting to see if shorting will be possible.
- sdljfslkjfdsj 9y ago
  I can't see shorting it outright without being wheeled out on a stretcher. Options will be the best play to safely express a bearish position with asymmetric risk/reward assuming they aren't priced to insanely due to IV. Still at least you know your risk.
  - deleted 9y ago
    [deleted]
  - lallysingh 9y ago
    Just use a stop order:https://support.gdax.com/customer/portal/articles/2426596 https://support.gdax.com/customer/portal/articles/2426596 There will be some slippage, but it'll be relatively bound.

dia80 9y ago

It means they will allow their account at the exchange to settle client trades. This will involve them using their existing collateral at the exchange to underwrite the client trades. They will in turn demand collateral from the client but may be potentially exposed if the client defaults.

olalonde 9y ago

Why don't their clients trade directly on the exchange? What value does GS provide here?

dragonwriter 9y ago
> Why don't their clients trade directly on the exchange? Because to do that with funds in a GS account that you use for trading other things, you have to take the money out, which adds friction?
vostok 9y ago
You still need to clear the trades even if you directly trade on the exchange. It's just not worth the expense for the vast majority of customers to maintain clearing memberships for every single product at every single clearing house.

osrec 9y ago

Clearing is all about novation. This basically means that the buyer and seller don't see each other as counterparties, but only see Goldman as the "middle-man" counterparty. It's a method of reducing counterparty risk, as both parties end up transacting with a credible institution, rather than directly with each other. This also means that the central clearing counterparty takes on counterparty risk, and that's pretty much what the clearing fees are paid to them for.

osrec 9y ago
As a footnote, I'm not sure how Goldman are going to novate the transactions - as in, will they actually issue 2 transactions on the blockchain?! I don't see a real need for that, given that the blockchain protects against such risks to a large extent. Maybe their definition of clearing for bitcoin is different to that for standard derivatives, in which case they will probably just help their non techy clients (i.e. many of the hedge funds in Mayfair and Manhattan) execute bitcoin transactions.
- tlrobinson 9y ago
  I believed the futures are “cash settled”, basically betting on the price of Bitcoin on other exchanges, not real Bitcoins.
vostok 9y ago
I'm not an expert on the nitty-gritty details of back office stuff, but typically novation comes into play when you're dealing with swaps. These are centrally cleared futures so you're not facing the person on the other side of the trade.

jpmattia 9y ago

I think there is something of term-of-art here. "Clearing brokers" (like Goldman) vet the clients who send transactions to the exchange. If the client defaults on a trade, Goldman is likely liable to the clearing house for the default amount, so it is in their interest to clear only those clients with sufficient collateral to provide margin. Note that a clearing broker is different from a clearing house. The clearing house serves as a back end settlement layer to an exchange, which serves as a front-end matching engine. https://www.investopedia.com/terms/c/clearingbroker.asp https://www.investopedia.com/terms/c/clearingbroker.asp Edit: There must be a bona fide finance guy here on HN to answer this knowledgably?

vostok 9y ago
This is the correct answer and only one of two correct answers at the moment. Aside from the difference between the clearinghouse and the clearing broker, the difference between the executing broker and the clearing broker is also interesting. For example you might have bank A as your executing broker and they give up the trade to bank B which is your clearing broker. You might even have your own exchange membership and bank B clears the trade for you.