CME Group (CME) and Intercontinental Exchange (ICE) - both stocks we have owned in the past (we just rebought CME Friday morning) are positioning for a piece of the very huge (and very troublesome) credit default swaps market. Basically, in layman's term this is a form of insurance but like all unregulated things it has turn perverse. What originally was supposed to be used as insurance against a position (debt) you held, has now turned into an AK 47 by hedge funds. The best quote I saw in the past month was just imagine if you could buy life insurance contracts on other people - what would their half life be?

The other issue with this, is these did not trade on an exchange like a stock - basically it is private party transactions - which can set up many abuses if you want to create an air of fear about a stock. Whose to say 2 hedge funds are not trading with each other and bidding the CDS up higher and higher - which creates an infinite upside. In theory the "seller" of the contract should have the money set aside to pay it off if in fact they are called to do it, but without any regulation in place - who is to know if any money is set apart. In fact, we know it has not been since AIG appears to be on the hook for a ton of these contracts and they obviously did not set aside enough - or else the Federal Reserve would not be offering them a lifeline (in case you missed it, on top of the original $85 Billion loan, AIG this week went and got another loan from the Federal Reserve ; this one for $38 Billion) So you have insurers who can be "anyone" (private party) who no one is watching to see if they even have the cash to pay off in case the insurance "comes do" - and these contracts are deemed by the market as a "signal" of the leath of a company's debt. It is all a big mess and can be gamed to such a degree - but hey 'free markets should not be regulated' ;)

Anyhow, this is a huge market and these seem to be the 2 favorites for the future exchange(s) - in fact CME Group announced this week plans for a market with giant hedge fund Citadel.