Thursday, 23 March 2006

The Price of Obscurity

What price knowledge? Recent graduates may have difficulty attributing any positive value to this commodity, but I want to be more specific - what is it worth to conceal your position?

A good example of this question comes up in the liquidity market. Suppose you are a bank and you need to raise 10B euros of short term funding, and this requirement is both persistent and not particularly volatile. You could go to the cheapest source, perhaps the interbank market. But after a while, given the limited number of participants, the market would know your funding requirement.

There are other sources of funding, of course: CP, CDs, lines, and so on. Spreading your funding around different markets is viewed as good practice, but it is obviously more expensive than just using the cheapest. (I'm not talking about duration here, just source of funds.) But if you move your funding around, a billion here, a couple of billion there, it is much harder for other participants to figure out what your requirement is and how volatile it is. Then if you need to draw on a line, it won't be a surprise, because you have done it before: there will be no information attached to you making a draw down.

Clearly a strategy that means you do not signal your intentions and situation to the market is helpful. But what is it worth? If extra line costs 10bps, when is that worth having? If you have to pay another big blind to be allowed to wear shades when playing poker, what would you do? An interesting problem...


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