ALPC
ALPHA INVESTMENT INC
stock OTC

So, the super tricky part is what's called "counterparty risk", which is the risk of the other party being able to pay you when it's due. The problem comes because things are almost never a perfect hedge for the market maker. In the example I had mentioned earlier with USD/MXP, imagine that one of the sides of the transaction happened 5 days after the first. In that case, the exchange rates wouldn't be the same for both sides of the transaction, meaning the market maker could make or lose money on the transaction. In an ideal world, they balance that out in a subsequent transaction, but that's rarely an option.
This is a position the market maker doesn't want to be in - they want a fee for distributing risk and matching counterparties, they don't want be gambling on the underlying market.
Now, on one transaction? Not a big deal. But when the trades are 9 figures and happen daily between lots of assets and counterparties, there could be a set of unicorn circumstances where if ONE of the market makers can't pay out on something, it takes down another one and it cascades. This is what we've now termed "too big too fail".
The OCC now audits for systemic risk to try to keep banks from getting themselves into those positions but it's still a LOT to calculate and manage. If a mine collapses in Burkina Faso and the global forecasted supply of zinc crashes and price skyrockets, maybe a market maker sitting on some risk that your bank has a credit default swap with goes bankrupt. Totally unrelated events and super hard to foresee. OCC and bank asset-liability policy committees (ALPC, "alpac") at the bank try to manage money in different risk buckets called capital tiers.
There was a global committee that meets to set best practices for this capital tier managment. The set of guidelines were referred to as BASEL II and BASEL III (i think it's still the current one?). Named after Basel, Switzerland where the conference happens.
More than you probably wanted to know... Sorry

So, the super tricky part is what's called "counterparty risk", which is the risk of the other party being able to pay you when it's due. The problem comes because things are almost never a perfect hedge for the market maker. In the example I had mentioned earlier with USD/MXP, imagine that one of the sides of the transaction happened 5 days after the first. In that case, the exchange rates wouldn't be the same for both sides of the transaction, meaning the market maker could make or lose money on the transaction. In an ideal world, they balance that out in a subsequent transaction, but that's rarely an option.
This is a position the market maker doesn't want to be in - they want a fee for distributing risk and matching counterparties, they don't want be gambling on the underlying market.
Now, on one transaction? Not a big deal. But when the trades are 9 figures and happen daily between lots of assets and counterparties, there could be a set of unicorn circumstances where if ONE of the market makers can't pay out on something, it takes down another one and it cascades. This is what we've now termed "too big too fail".
The OCC now audits for systemic risk to try to keep banks from getting themselves into those positions but it's still a LOT to calculate and manage. If a mine collapses in Burkina Faso and the global forecasted supply of zinc crashes and price skyrockets, maybe a market maker sitting on some risk that your bank has a credit default swap with goes bankrupt. Totally unrelated events and super hard to foresee. OCC and bank asset-liability policy committees (ALPC, "alpac") at the bank try to manage money in different risk buckets called capital tiers.
There was a global committee that meets to set best practices for this capital tier managment. The set of guidelines were referred to as BASEL II and BASEL III (i think it's still the current one?). Named after Basel, Switzerland where the conference happens.
More than you probably wanted to know... Sorry