“Despite its forbidding name, the CDS (Credit Default Swap) is a simple idea: it allows an investor to buy insurance against a company defaulting on its debt payments. When it was invented, the CDS was a useful concept because more people felt comfortable owning corporate debt if they could eliminate the risk of the issuer failing. The extra appetite for debt helped lower the cost of capital” -
“Derivatives: Giving Credit Where It Is Due,” The Economist, November 6, 2008
"The CDS was completely outside regulatory boundaries, having obtained unique protection as a result of the Commodity Futures Modernization Act of 2000. The CDS was in fact a position or play which had been outlawed for more than a century (the bucket shop) - that is, until major financial market deregulatory steps were taken in 1999 and 2000. A bucket shop was a type of gambling house in which one could speculate on stocks rising or falling in price without owning the stock." -
A quote from “Multinational Business Finance” 13 Ed by Eiteman, Stonehill and Moffet
Although bucket shops may have been illegal, stock options strategies which are perfectly legal provide the same benefit of speculating on stocks rising or falling without ever owning them. Thus, why would bucket shops be illegal while trading options are not?
Any thoughts?
Here you have some terms that come to my mind: hedging, speculation, naked positions, regulation or limit speculation?, market efficiency, regulation, tax evasion, unnecesary systematic risk, transparency, reporting,...