:: The Park Paradigm ::

Markets for the Digital Generation

Volumes on the CBOE continue to go from strength to strength. As reported in on eFinancial News last week, average daily volume for 2006 stands at 2.5 million contracts up 49% from 2005’s 1.86 million contracts per day average (which itself was up 30+% from 2004 volumes.) This includes a record day last week when 5.7 million contracts were traded.

Industry leaders see no sign of this growth abating. The CEO of CBOT (Bernard Dan) predicted that as many a 200 billion derivative contracts could be traded annually by 2015. (In 2005, approximately 10 billion contracts were traded globally.) A board member of Eurex was a bit more cautious predicting 100 billion, while the CEO of Euronext.liffe suggests that volumes will quadruple every 5 years - a futures and options version of Moore’s Law? …Freedberg’s law anyone?

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Thanks to JP for the pointer to this article penned by Steven Johnson (author of a number of very interesting books including one of my favorites Emergence: The Connected Lives of Ants, Brains, Cities, and Software.)

Today’s kids see the screen as an environment to be explored, inhabited, shared and shaped. They’re blogging. They’re building their MySpace pages. They’re constructing elaborate fan sites for their favorite artists or TV shows. They’re playing immensely complicated games, like Civilization IV–one of the most popular computer games in the U.S. last fall–in which players re-create the entire course of human economic and technological history. I believe this dramatic spike in digital participation is, for the most part, sharpening the minds of Generation M, not dumbing them down.

Generation M is the digital generation.

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from Web 3.0: Google as the Web:

With Google’s cheap computer cycles and their ability to organize information they have the ability to make many markets far more efficient, then take a cut of the profits from the efficiency they created.

…As more of the offline world goes online they will be the default inventory management system for many consumers, retailers and wholesalers….

…I think that within 20 years they will become the default commodities trading platform worldwide. Not only do they tie historical performance to news, but they also have the largest database of intentions and allow anyone to look at historical performance or compare brand strength and trends at the keyword level. What sort of bets, spreads, and prices could Google offer compared to others when so many people are willing to share their dreams, desires, consumption habits, needs and fears with them.

(thanks to Kid Mercury for the pointer)

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I’ll admit that like anyone else I fall victim to pre-conceived notions no matter how consciously I try to avoid doing so. As I know from reading the work on behavioral finance of my colleague James Montier, it is a somewhat inevitable consequence of the human condition. Heuristics are part of the human OS, and while they serve us terrifically in many many instances, they have bugs known as cognitive biases. Even when we are conscious of these potential traps, they are fiendishly difficult to avoid. One of my favorites (with which I do battle daily), is confirmation bias:

Confirmation bias is a type of statistical bias describing the tendency to search for or interpret information in a way that confirms one’s preconceptions. In inductive inference, confirmation bias is a type of cognitive bias toward confirmation of the hypothesis under study. To compensate for this observed human tendency, the scientific method is constructed so that we must try to disprove our hypotheses.

And so I have to admit that had you asked me a week ago to name my “Top ten list of large incumbent financial services firms most likely to succeed in the AmazonBay future”, it is very unlikely that Fidelity would have made my list. On the basis of the evidence brought to my attention over the past week, I think they’d probably make the list today.

Joel P. Bruckenstein at Morningstar wrote an excellent article on what Fidelity are doing with their Fidelity Labs initiative. I’d encourage you to read it but in a nutshell, they have taken inspiration from Google Labs to set up a unit that experiments with applying new technologies to their core business of distributing retail financial products and services.

The first products to emerge in beta from their lab, are Financial Search and Mortgage Search. The first is an optimized and enhanced search engine to search for financial products and services, while the second is a more specialized search engine for mortgage products that combines an intelligent ‘wizard’-like interface to help the user define their search appropriately. A cynic might say - so what? - these are things that exist already or are of marginal extra value to the user compared to the tools and products at their disposal today. I think that would be to miss the point. We are just scratching the surface. Early projects like this are as much about showing what is possible and learning what is relevant as they are about directly and immediately creating economic value.

If Fidelity is to be successful in the medium to long term with this venture I think they will need to guard against what I would call the institutionalisation of this group. Large organisations (probably necessarily) value order and conformity and process to an extent that makes non-linear innovation very difficult, if not impossible - even in companies with an enlightened and progressive culture. Anyhow I’ll be keeping them on my radar screen and look forward to watching this initiative evolve.

(btw I’d like to thank a colleague - Kiyo - for pointing Fidelity Labs out to me.)

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There are thousands of column inches already out there describing Google’s entry into the online-finance-portal arena, so there isn’t much point in me repeating or rehashing a factual review of their inaugural offering (for a good summary see Rob Carrick’s review from the Globe and Mail) and the following comment from a post on Internet outsider is one that I would agree with:

I am an analyst at a large I-bank and as you can imagine Yahoo Finance is a very valuable resource that we primarily use for quick, general reference. Well after using Google Finance for just a few minutes (and please, type in a company name and see where it takes you before concretizing your opinion on the site), my colleagues/friends that I have spoken with both here and at other firms are definitely switching over.

And here’s why:
- Clean, simple interface that is extremely easy to navigate
- In general, all relevant info is right on the page in front of you (as opposed to on Yahoo where its on sub pages that you need to link to)
- Excellent combination of AJAX and Google’s search tech for the really cool annotated historical stock price graph
- Direct links to tons of relevant additional information (ex. investor relations and other pages from the company, recent news stories, comparable companies, management details, etc.)
- Blog postings! This is a very interesting touch that connects the user to other simple users – absent the filter of big media. This personalizes the information available at your fingertips.

Even with all the great features available on Google Finance, the most unique differentiator between this site and Yahoo Finance is that Google’s site is merely a content AGGREGATOR (like Google News), and not a content PRODUCER. It is really in this capacity that the new finance site is right inline with everything else Google throws out to us users.

Now I am not saying this site is perfect – in fact, it still lacks some of the useful data breakouts that Yahoo provides – but it is an excellent first step, one that is clearly unique from, and an improvement over, Yahoo’s and other free offerings.

Google’s stated goal was to “to improve the search experience for financial information” and (despite a restricted universe of geographies and instruments to start with) makes a good first impression.

Nothing they are doing so far hasn’t been thought of before (as Jeremy Zawodny laments on his blog), but actually acting on those ideas and building it is the key. It reminds me of a project I scoped a few years back for the bank that I work for that never really saw the light of day due to a lack of resources and the usual problem of the urgent getting in the way of the important. It also reminds me to some extent of the Markit portal (unfortunately login only and no demo, sorry - however there is a screenshot here) that have taken an analogous approach to organising financial data. If I recall correctly, I believe Markit use Relegence to organise and map their news and information feeds.

It will be interesting to see how this evolves, obviously the possibilities are endless - it really depends on what ambitions Google have for this in the short, medium and long term and what resources they want to dedicate to developing this.

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…as rising e-trading volumes eat into commissions

Sans commentaire.

As reported in Reuters:

…The job cuts also reflect the shift by big institutional investors toward cheaper electronic and direct-access trading, further slashing commission revenue. Johansson last month told analysts U.S. commission rates had fallen 18 percent from 2003 to 2005, while European commission rates fell 13 percent. Commissions will fall further, he said, as more investors shift trades from full service brokers to electronic systems or separate research payments trading costs.

(Thanks to David H for the pointer.)

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The Sunday Times reports that Rapid Mobile has sold its Mobet software to Betfair.

Mobet is a fully transactional mobile client for Betfair, allowing you to back and lay on the full range of markets directly from your mobile phone using your normal account - anytime, anywhere.

I think the ability to trade anything, anywhere will become more and more important. This is especially true for what I would call location/time specific events or outcomes - ie where it is helpful to be on site and there is a time dependency; obviously sporting events fall into this category and so it is natural that demand / take-up for mobile trading solutions has been strongest here. Also, sports trading or betting is considered by many users and by regulators as a leisure activity and so the cultural and regulatory barriers to mobile activity are lower than for instance financial products.

Indeed, while I am certainly no expert, I would speculate that the biggest impediment to reaching the tipping point in terms of mobile trading solutions becoming ubiquitous in financial markets is not technological - at least not in terms of the interface - but relates to security and compliance. The trading provider that creates a streamlined solution that meets the security and compliance requirements of wholesale financial services providers and customers will have an interesting headstart in what will ultimately be a very important channel.

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Great graph courtesy Morgan Stanley, via the Economist, illustrating relative valuations of major equity and derivatives exchanges around the globe:

A couple key points highlighted in the article:

…And even if the merger doesn’t happen, the mere possibility illustrates convergent and accelerating trends among the world’s exchanges. These include a shift from mutual ownership to listed exchanges, rapid advances in and dissemination of technology, and increasingly sophisticated users who want to trade across borders and asset classes…

…With a transatlantic merger looming, exchange users in London voiced concerns this week that they might be subject to American regulators in future. Britain is generally seen by international investors as a more welcoming regulatory environment than the United States, especially since America passed the Sarbanes-Oxley and USA Patriot acts…

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Or just (another) online marketing deal?

As many of you will have already read, this weekend Fidelity Investments has inked an agreement with Amazon to sponsor a new financial services store on Amazon.com.

Press reports indicate that Amazon customers will be able to access a Fidelity-sponsored web page from links on Amazon’s home page. This would at first glance seem to be rather less exciting than the idea of actually selling mutual funds and other investment products via Amazon’s e-commerce platform and indeed some early commentators are referring to the deal as “just” an (elaborate) marketing agreement rather than anything more innovative or ground-breaking.

Obviously I have no idea what exactly Fidelity and Amazon have in mind either in the short or the long term, but even if it is only a marketing alliance in the first instance, I think it is a very interesting deal as the potential clearly exists for this relationship to develop and evolve over time into something more substantive. As to Amazon’s motives they are fairly obvious as stated by the company itself:

‘’It’s our goal to provide our customers with the ability to find, discover, and buy anything they want on the Internet, and that includes financial services,” said Craig Berman, a spokesman for Amazon.com in Seattle. ‘’Customers have been buying books about personal finance, retirement, colleges, and so forth. So this is a natural extension.”

Is this an early substantive step towards an AmazonBay future in financial services? I think so.

By starting out this way, it would seem that Amazon and Fidelity avoid having to resolve/engineer all the compliance and regulatory issues that would arise from a deeper integration and move up the learning curver considerably before deciding how and when to move forward in that direction.

Finally, this is another potential example of retail/consumer (as opposed to wholesale/industrial) markets driving innovation and change. This will be one of the fundamental differences between 20th century and 21th century economies and markets.

Update:
Not sure about the blog implementation (ok I know only one post, so I’m cautious about jumping to conclusions in haste)… potentially a good idea, but first post looks slightly too close to Captain Morgan for comfort.)

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The Economist as usual has an excellent report on Open-source business, especially for those who are unfamiliar with the concept. An excerpt:

But the benefit of open-source approaches is that they can tap into a far larger pool of resources essentially at no cost. Once the early successes are established, it is not clear that the projects can maintain their momentum, says Christian Alhert, the director of Openbusiness.cc, which examines the feasibility of applying open-source practices to commercial ventures.

But there are arguments in favour of open source, too. Ronald Coase, a Nobel prize-winning economist, noted that firms will handle internally what it would otherwise cost more to do externally through the market. The open-source approach seems to turn this insight on its head and it does so thanks to the near-zero cost of shipping around data. A world in which communication is costly favours collaborators working alongside each other; in a world in which it is essentially free, they can be in separate organisations in the four corners of the earth.

Perhaps that is why open source is taking up a permanent place as a facet of modern business. As open source begins to look more corporate, corporations themselves are looking to adopt and adapt more open-source practices.

For example, Toyota has organised its teams in ways that stress the same sort of decentralisation, flexibility and autonomy that exist in the Linux community, according to Philip Evans and Bob Wolf of the Boston Consulting Group in an article in the Harvard Business Review last July. As such, conventional companies would do well to embrace the work-style, the authors note, such as sharing knowledge widely, establishing reputation systems, and creating a community in which people work for peer recognition as much as remuneration. The lesson is that companies stand to gain by giving up a degree of control over their proprietary knowledge—or rather, some of their proprietary knowledge. (my emphasis)

This (lesson) is particularly true anytime you have a market or an industry where network effects are substantial. This is the case in many instances in software and electronic media, but it is equally true if not more so in many areas of capital markets. Unfortunately (and somewhat ironically) this reality clashes with the typical cultural DNA of most investment banks and broker-dealers who’s mindset tends to be firmly rooted in a closed and proprietary model; an evolutionary hangover from the very successful 20th century ‘information arbitrage/clearinghouse’ business model that prevailed in the industry. I don’t want to paint too bleak a picture, there are some small advances being made, but to understand the missed opportunity (to date), one needn’t look much further than the FIX Protocol - a messaging standard developed specifically for the real-time electronic exchange of securities transactions. The result is sort of akin to what you would get if Microsoft and Oracle set up a non-profit to manage Linux… (btw anyone interested in following the goings on in the ‘FIX space’ could do worse than reading Sam Johnson’s blog Connected.)

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