:: The Park Paradigm ::

Markets for the Digital Generation

I’m sure if you were interested you could dig up some giant number worked out by a consulting or market research firm quantifying the size of the global (or regional or national) sports market - with varying degrees of inclusiveness (professional sports, sporting goods, etc.) as to what qualifies. (If you google ’size of global sports market’ you get 7 million plus entries…the first entry quantifies what appears to be the global market in just sporting equipment at $235 million per annum…) Anyhow the point is (one that I have highlighted previously) that sports is a very real and very significant industry sector in most if not all developed economies (and is growing very quickly elsewhere, especially in Asia.)

Promoting or discussing sports markets is not per se the core theme of this blog but is definitely a secondary thread, especially insofar as with the extraordinary development of traded activity on sites such as Betfair, it (sports) is a fantastic example of how combining information, communication and market technologies can transform any industry into a more transparent, tradeable and hedgeable proposition. So when I stumbled accross The Sports Economist blog (via a new blog entitled All Growth is Sexy), I thought is was worthwhile to bring to your attention: the economic issues it discusses are exactly those that would have relevance for actors in the sports markets in terms of risk management (on exchanges such as Betfair) and provide excellent context for my commentary on market mechanisms as applied to sports. Of course the crowning irony is that much of the focus on The Sports Economist is on US sports and due to the archaic legal and regulatory environment in the US, these are the actors least able to access relevant risk management tools. A not insignificant irony as it is clearly the world’s (economically) biggest sports market. And indeed perhaps if US legislators were exposed to more analysis like that found at the Sports Economist they would perhaps take a more rational and less emotional approach to sports trading (and by extension, trading or risk management of other ‘non-traditional’ risks.) So on the off chance that some of these leaders might stumble accross the Park Paradigm, I’ve added the Sports Economist to my blogroll…

I also stumbled accross the AllSportsMarket recently. They bill themselves as follows:

AllSportsMarket is an online financial exchange crafted after the same professional trading platform used by the gurus of Wall Street. You buy and sell issues in AllSportsMarket sports teams, players, and events with real money. Just like the real markets, you are competing against other players for real cash! You earn money from the rise and fall of prices along with dividend payouts!

Basically it appears to be an online real-money fantasy sports league. As someone who has never participated in such a game, I’m ill placed to say whether or not their product (markets and trading platform) is well-thought out, but thought it was another interesting manifestation of how economic risk in sporting markets might be traded and managed. (However I must say if I were a potential customer I wouldn’t be very reassured by the lack of information about the corporate identity and location of the service. I assume this is deliberate and reflects a fear of US prosecution despite the blunt assertion in the FAQ section that it is not a sportsbook and that it is not gambling but a “skill-based Player-vs-Player Game.” Raises the point again, that for anyone (government) worried about potential impropriety surrounding such a market, wouldn’t it be better to legalize, regulate and monitor?)

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(From Fortune:)

Leo Melamed, godfather of the Chicago mercantile exchange, changed investing forever with financial derivatives. Here’s what this market visionary thinks is next.

Way back in 1972, the head of the Chicago Mercantile Exchange had a crazy idea: If you could trade futures on pork bellies, wheat and beef, Leo Melamed wondered, why not on Swiss francs or deutsche marks? Or any other financial instrument for that matter? That notion has radically changed the way market risk is managed.

Way back in 2000, Andrew Black and Ed Wray had a crazy idea: If you could trade derivatives on financial instruments, why not on the outcomes of horse racing or soccer? or any other sport for that matter?

Here in 2007 (and for the past 2-3 years), I’ve been thinking about what I call particle finance, as analagous to particle physics. I firmly believe that advances in information and communication technology will allow us to reduce financial (and more broadly speaking) risk management to its smallest and most fundamental component parts. We are on the verge of discovering and being able to manipulate the quarks of the risk management universe. The ramifications (if my thesis is correct) are enormous and potentially highly disruptive.

In many instances progress will be hampered by powerful incumbents protecting the status quo via regulatory and legislative barriers. But ultimately I don’t think you can keep the genie in the bottle; the US in particular runs the risk of losing it’s pre-eminent position as an innovator in financial services and risk management unless they succeed in reforming their often parochial and restrictive regulatory environment. This in fact was the conclusion of Mayor Bloomberg and Senator Schumer in their recent report on the future prospects of New York as a global financial center:

The joint report stipulated that while many of the causes are due to improved markets abroad and sophisticated technology that has virtually eliminated barriers to the flow of capital, a significant number of the causes for America’s declining competitiveness are self-imposed. For instance, U.S.-based financial services firms are now unable to attract and retain many of the highly-skilled professionals they need because of caps on the number of visas available under U.S. immigration rules. A greater perceived litigation risk has also reduced the appeal of the U.S. market to many foreign firms. Finally, a complex and sometimes unresponsive regulatory framework has not only prompted many foreign firms to stay out of the U.S. markets, but also is forcing more business overseas because of the complexity and cost of doing business in U.S. financial markets regardless of where they are located. The joint report offered several recommendations, derived from detailed analyses of market conditions here and abroad, informed by interviews with more than 50 respected leaders drawn from the financial services industry, consumer groups, and other stakeholders. The recommendations focus on near-term administrative actions that can signal renewed U.S. focus on competitiveness, actions to level the playing field for both domestic and foreign companies doing business in the United States, and longer-term initiatives to address more complex policy, legal, regulatory and other structural issues affecting the U.S. position as the world’s leading financial center.

Their recommendations are straightforward and would indeed have a powerful liberating effect on American financial and risk markets, to the benefit not only of American individuals and corporations but also globally given both the size and depth of US markets and the proven American ability to marshall innovation (when allowed to do so - it is not a coincidence that the US is starting to fall behind in telecoms and financial services as these happen to be two of the most protected and regulated industries…), let’s hope they gain the grass-roots political traction they deserve and don’t get hacked into irrelevance by the dinosaur brigade:

Recommendations to sustain the nation’s and New York’s global financial services leadership:

Provide clearer guidance for implementing the Sarbanes-Oxley Act;

Implement securities litigation reform with particular short-term emphasis on leveraging the SEC’s existing authority;

Develop a common vision and a supporting set of shared regulatory principles;

Ease immigration restrictions facing skilled non-US professional workers;

Recognize IFRS without reconciliation for listing purposes and promote convergence of accounting and auditing standards;

Protect US global competitiveness in implementing the Basel II Capital Accord;

Form an independent, bipartisan National Commission on Financial Market Competitiveness to resolve long-term structural issues;

Modernize financial services charters and holding company structures;

Establish a public/private partnership to promote New York’s local agenda by acting as the high-level liaison between individual industry participants and the city, as well as by driving forward the partnership’s broader strategic plan for New York’s financial services development.

More actively managing attraction and retention for financial services;

Establishing a world-class Center for Applied Global Finance, and

Potentially creating a special international financial services zone.

Anyhow, to come back to the original point - Leo Melamed and the CME should indeed be celebrated for their role in bringing financial derivatives to life and developing and extremely important and robust set of markets that are now part of the very fabric of our global economy. At the risk of sounding presumptuous, I would love to be able to look back in 20 years on a legacy analogous to Mr. Melamed’s; as one of the people who were instrumental in bringing the benefits of particle finance - of ubiquitous and super-efficient risk management and risk transfer - to a global audience. I’ve often been thought crazy (by my managers or colleagues) but apparently I’m in good company here:

(Leo Melamed describing how he came upon the idea of financial futures) And then, finally, I came to the thought that Bretton Woods, the fixed-exchange-rate system, was coming apart. And when it finally comes apart, wouldn’t there be a need for foreign-exchange futures? Our board thought I was crazy, and very frankly I thought it was a little crazy too, because why hadn’t anybody else done this? I went to Milton Friedman, though, and he absolutely embraced the idea.

Well I don’t have Mr. Friedman but I was a syndicate manager and so I guess my challenge over the coming years will be to successfully syndicate my ideas. I’m still thinking about what the right structure might be…but good ideas, like good bonds, tend to sell themselves (but a good story always helps to get the ball rolling!)

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Despite often espoused (blogging) wisdom, I try mostly to stay on topic and not dilute the (hopefully interesting and insightful!) content stream on markets and such with banal ramblings about my life and what I had for breakfast and such. I figure most of the people who read this aren’t really interested in Frosted Flakes and insofar as I use this platform as an archive of my own thoughts and ideas on markets and financial services and their current and future evolution (and not as a diary or personal journal), I have different (and better adapted) venues to keep track of breakfast foods and other more important personal memories and milestones.

However, feeling somewhat guilty for not having posted much - other than a brief flurry in mid/late January - and even more guilty for not having responded (or even read!) 80%+ of the emails in my inbox since before Christmas - I thought this would be the best venue to explain why and ask for indulgence (and apologize if I’ve missed something really important.) As regular readers will know, late last year I took the big step off the investment banking treadmill with the intention of taking 6-12 months off to hang out with my family, to repair my lamentable physical fitness, to catch up on my reading and maybe in the background make sense of where (from a business point of view) I should point my energies and talents next - perhaps catch a glimpse of the forest and not just feel surrounded by trees…

But given my passion for markets and all the amazing opportunities that seem to arise at an alarming rate and all of the smart and interesting people I have been so fortunate to have been connected to over the past several years, I was wise enough to know that unless I made a clean break for a few months my first two goals would be doomed to remain unfulfilled and my sabbatical so to speak, largely wasted. Over the past decade, I discovered the only time I ever really managed to disconnect with my job and the markets was when I was busy immersed in another passion of mine (and better yet of my family’s) which is skiing and racing. So given all this and the time of year there was only one logical thing to do. Go skiing.

So that’s what I’ve been doing. And it doesn’t leave much time (or more importantly energy) for blogging or emailing or doing much of anything else other than reading, soaking in a hot bath and playing with the kids. The last week in particular was quite intense with lots of racing. I entered a number of FFS races and (in chronological order), this is how I did:

GS 21st
GS 36th
SL Dsq
GS 15th
GS 18th
SL 14th (picture at left from 2nd run)
GS 14th

(for non ski geeks, SL - Slalom, GS - Giant Slalom)

My goal had been to get into the Top 15 and by the end of the week I had managed that. In early March I have another week of racing (a competition I’ve entered every year for the last 10 years) and my stretch goal is to aim for at least one top ten finish, and consistently finish in the top 15. I’ll need to work hard over the next 3 weeks if I’m going to have a chance to fulfill this goal as the competition will most likely be tougher than at last week’s races.

So anyhow, to those of you who have tried in vain to reach me over the past couple months, apologies: I haven’t forgotten you, it’s just that I’m fully focused on goals 1 and 2 (and a poor start to 3) above until at least mid-March. And I’ll try to post a couple times a week - funny thing is out here in the mountains, I’m starting to see the forest very very clearly…

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I was pointed towards this CNET article - A New Crop of Kids: We Generation - by one of the many blogs I follow on my netvibes page…I just can’t remember who! This is your future customer:

Gabriel, an intensely curious kid who’s about to turn 8, has been fascinated by everything from skateboarding and basketball to statistics about world extremes (like the tallest building in the world). He likes to look up information about the subjects on Wikipedia with his mom and then turn to YouTube for short video clips of kids playing sports. If he hears a likeable song in a YouTube video, he might visit Apple’s iTunes store to download the music, too.

Then again this is Amy Jo Kim’s child so maybe not completely typical!

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