Quality and qualification: from fruits to CDOs
May 22, 2008
Randy Wesgren from Org and Markets offers an initial report about a wholesale fruit and vegetable exchange in Belgium. The market, if I understand correctly, acts, among other things as a standardization-to-price device (qualification, a-la Callon) for the quality of the produce:
all growers receive an identical payout, even if their particular lot of a given quality drew a higher/lower bid.
The standardization of prices and qualities is fundamental to the operation of markets. However, in financial markets is so deeply embedded into the operational procedures that it is easily overlooked. For example, practices such as minimal obligatory tick size and ranking of credit products are examples to such practices of price-qualification (note, the dash is there to indicate continuity). This deep entrenchment of qualification processes in financial markets can be part of the reason that SSF people like commodities markets so much (Garcia’s classical study of a strawberry market is a notable example). In commodities markets it is much easier to untangle the mechanisms that, in practice, perform the standardized qualities and to communicate these than, say, in markets for credit derivatives. After all, it is much easier to spot a rotten strawberry than to recognize an illiquid CDO.