Tett on oil Price Reporting Agencies (PRAs)
April 14, 2012
Gillian Tett notes that the Price Reporting Agencies, or PRAs in the oil industry rely heavily on quotes from select industry players to calculate their benchmark prices (FT, April 12).
This situation resembles the calculation of LIBOR reported by Donald Mackenzie in an article in the London Review of Books. As Mackenzie noted back in 2008, “Just after 11 a.m. on every weekday that’s not a bank holiday, traders at leading banks send in their estimates of the interest rates at which their banks could borrow money.”
Tett suggests the PRAs should take note of the fire LIBOR has come under and consider how they might reform themselves.
Angel Knight, who headed up the British Banker’s Association (the trade association responsible for LIBOR) during the tumultuous period of the credit crisis stepped down in early April 2012 under the mounting threat of regulatory intervention on how LIBOR is set.
The method of compiling price quotes from market participants to set benchmark prices must have an interesting history. Where does this convention come from (I’m guessing, trade associations) and what was it originally used for? And what is it about this practice that strikes us as a potential sources of unfairness in markets today?
There is definitely a good story about how pricing in markets is evolving in the threads of this history…