JP Morgan and Deutsche move to offer broad indexes

JP Morgan Chase and Deutsche Bank have signed up to US technology solutions provider Longitude’s Parimutuel Digital Call Auction (PDCA) technology, which could herald the introduction of broader index trading based on economic data. The PDCA technology will allow the banks to provide new derivatives and risk management products to their customers without assuming the market risks normally associated with the facilitation of risk transfer.

"Products created using PDCA technology are self-clearing and self-hedging, and are priced according to customer particpation," said Andrew Lawrence, Longitude's chief executive. "This means they are not dependent on supply and demand constraints."

JP Morgan Chase has signed up the PDCA technology to create products based on economic statistics published by the US government and US government agencies. Deutsche will use Longitude's product to create derivatives based on economic statistics published by European and Japanese governments. These products will provide investors with explicit pricing and trading of economic factors, such as inflation and productivity that impact a wide range of asset classes.

"We see an enormous opportunity here to provide our customers with an entire new category of risk management and investment capabilities," said Hal Herron, European head of global markets at Deutsche Bank. "PDCA technology will allow us to offer products and risk mitigation in these markets - something that was not previously possible."

The idea of broader indexes based on economic data, such as GDP, has been mooted by academics for some time. Professor Robert Shiller, of Yale University, said in a speech at Risk magazine’s Risk 2001 USA conference in June that 96% of national income is trapped in illiquid assets. He and others have called for the development of markets that would unlock this value and allow people to hedge almost any exposure.

Both JP Morgan Chase and Deutsche expect to launch their initial PDCA products later this year.