Mark to Market: Why Not Bend the Rules on a Temporary Basis?
Moby Waller submits:
First, I don’t claim to be a world-class expert on the intricacies of bank balance sheets, collateralized mortgage obligations (CMOs), and the like. But the debate regarding the "mark-to-market" ((MTM)) of bank and investment company assets is a fairly familiar subject to me, as I am experienced with derivatives, leverage and risk. As a former CBOE Market Maker, I had open options positions with a stock hedge (that were at times gigantic and involved hundreds of strikes on a single equity) that had to be priced every single trading night. The pricing of these options is called mark-to-market — basically the clearing firm would price every option, usually using a bid/ask average or a theoretical price, depending on its liquidity. This would then be compiled into a risk profile/risk matrix on that particular equity’s options.
Currently as a Portfolio Manager at BigTrends, we "mark-to-market" our client trade recommendations every trading night, using auto-broker fill prices and bid/ask averages. A Bid/Ask average is often better to use for options than Last Trade, because some options may not trade very often if at all during a given day. For stock positions, the Last Trade is an easy logical way to mark-to-market, which is what brokerage houses use to value your positions.
