Template:Triplecocktail why should i pay your hedging costs

“Why should I pay your hedging costs? I have no control over them” argument is bogus

Sniffy buyside counsel — especially ISDA specialists who have adapted to PB without really understanding it, might try the your hedging costs are your problem line. It's bogus. Synthetic PB is just cash brokerage done with derivatives. The client would wear them in a cash trade — the format of the transaction shouldn’t make a difference.

• The broker owes best execution. That means it has to interrogate all venues and get the best possible price.
• Under best execution rules the client may instruct the broker to exclude certain venues and brokers.
• To comply with best execution, the broker must configure its order router to accommodate the client’s preferences.
• But excluding a venue impacts the quality of the available execution (whenever the excluded venue had the best price, you’d miss it).
• By not excluding the venue, therefore, you benefit from the venue being present (as long as it doesn’t fail) every order you place.
• Trades settle DVP so there is market risk in replacing the trade, not credit risk.
• The market risk could be significant: failure of a venue will heavily impact liquidity and market volatility for a period.
• Asking the broker to underwrite a market loss when a venue or intermediate broker fails while getting the benefit its best pricing as long as it does not is asking for a free option on your own execution risk.