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Articles filed under 'markets'

This is no way to run a financial system

The micro-cracks are turning into fissures, soon to be gaping crevasses as (finally) the obsolescence of our industrial age banking system plays itself out in spectacular front page headlines. Meanwhile it would seem that our society and our leaders are (mostly) frozen in some kind of macabre trance – eating popcorn and mesmerized by the inevitable Crash.

If you look at the LIBOR scandal in the context of the technology of the fast emerging information economy, it is absolutely mind-boggling that such an anachronistic process even exists in the world of 2012. In a world where every financial flow is digitized and only really exists as an entry in a database. In a world where truly enormous real-time data sets (ones that make the underlying data required for a true LIBOR look puny) are routinely captured and analyzed in the time it takes to read this sentence. In a world where millions (soon billions) of people have enough processing power in their pocket to compute complex algorithms. In a world where a high school hacker can store terabytes of data in the cloud.  In this world, we continue to produce one of the most important inputs into global financial markets using the equivalent of a notebook and a biro… WTF???

You think I’m joking? Libor is defined as:

The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time.

For each (of 10) currencies, a panel of 7-18 contributing banks is asked to submit their opinion (yes, you read right) each morning on what each rate (by maturity) should be. The published rated is then the “trimmed arithmetic mean”; basically they throw out the highest and lowest submissions and average the rest. No account is taken of the size or creditworthiness or funding position of each bank and the sample size after the “trimming” for each calculation is between 4-10 banks. However, the BBA assures us that this calculation method means that:

…it is out of the control of any individual panel contributor to influence the calculation and affect the bbalibor quote.

You don’t need to be a banker or a quantitative or statistical genius, or an expert in sociology, or even particularly clever to figure out that this is a pretty sub-optimal way to calculate any sort of index, let alone one that has an impact on the pricing and outcomes of trillions of dollars worth of contracts…

In the 1980s when LIBOR was invented – and (lest the angry mob now try to throw the baby out) it should be said an important and good invention – this methodology just might have been acceptable then, as the “best practical solution available given the market and technological context.” Banks used to have to physically run their bids in Gilt auctions to the Bank of England (thus why historically banks were located in the City, tough to compete on that basis from the West End or Canary Wharf, at least without employees a few Kenyan middle distance Olympians…) But you know what?  And this is shocking I know… They don’t do it that way anymore!!!

So if LIBOR is important (and it is), how should we be calculating this in the 21st century? Here’s a few ideas:

  • include all banks participating in the market – and not necessarily just those in London – how about G(lobal)IBOR??
  • collect and maintain (in quasi-real time) important meta-data for each contributing bank (balance sheet size and currency breakdown of same by both deposits and loans, credit rating, historical interbank lending positions, volatility/consistency of submissions, derivative exposure to LIBOR rates, etc.)
  • collect rates and volumes for all realized interbank trades and live (executable) bids and offers (from say 9-11am GMT each day)
    build robust, complex (but completely transparent and auditable) algorithms for computing a sensible LIBOR fixing arising from this data; consider open-sourcing this using the Linux model (you might even get core LIBOR and then forks that consenting counterparties might choose to use for their transactions, which is ok as long as the calculation inputs and algorithms are totally transparent and subject to audit upon request1)

This is not only possible, but in fact relatively trivial today. Indeed companies like the Climate Corporation*, Zoopla*, Metamarkets*, Palantir, Splunk (and dozens and dozens more, including newcomers like Indix* and Premise Data Corp) regularly digest, analyze and publish analogous datasets that are at least (almost certainly far more) as big and complex as the newLIBOR I’m suggesting.

Indeed, the management of this process could easily be outsourced to one – or better many – big data companies, with a central regulatory authority playing the role of guardian of standards (the heavy lifting of which could actually be outsourced to other smart data processing auditors…) In theory this “standards guardian” could continue to be the BBA (the “voice of banking and financial services”) but the political and practical reality is that it should almost certainly be replaced in this role, perhaps by the Bank of England, but given the global importance of this benchmark, I think it is also worth thinking creatively about what institution could best play this role. Perhaps the BIS? Or ISO? Or a new agency along the lines of ICANN or the ITU - call it the International Financial Benchmarks Standards Insitute (IFBSI)? The role of this entity would be to set the standards for data collection, storage and computation and vet and safekeep the calculation models and the minimum standards (including power to subsequently audit at any time) required to be a calculation agent (kitemark.) Under this model, you could have multiple organizations – both private and public – publishing the calculation and in principle if done correctly they should all get the same answer (same data in + same model = same benchmark rate.) Pretty basic “many eyes” principal to improve robustness, quickly identify corrupt data or models.

As my friend (and co-founder of Metamarkets and now Premise Data Corporation) David Soloff points out:

TRUST ONLY THE MACHINES.

And it’s not just LIBOR as Gillian Tett highlights in the FT:

If nothing else, this week’s revelations show why it is right for British political figures, such as Alistair Darling, to call for a radical overhaul of the Libor system. They also show why British policy makers, and others, should not stop there. For the tale of Libor is not some rarity; on the contrary, there are plenty of other parts of the debt and derivatives world that remain opaque and clubby, and continue to breach those basic Smith principles – even as bank chief executives present themselves as champions of free markets. It is perhaps one of the great ironies and hypocrisies of our age; and a source of popular disgust that chief executives would now ignore at their peril.

Rather than join the wailing crowd of doomsayers, I remain optimistic. The solution to this – and other similar issues in global finance – either exist or are emerging at a tremendous pace. I know this because this is what we do here at Anthemis. But I’m clear-headed enough to know that we only have a tiny voice. Clearly it would seem that our long predicted Financial Reformation is starting to climb up the J-curve. I just hope that if Mr. Cameron does launch some sort of parliamentary commission that voices that understand both finance and technology are heard and listened to. Excellent, robust, technology-enabled solutions are entirely within our means, I’m just not confident that the existing players have the willingness to bring these new ideas to the table.

* Disclosure: I have an equity interest, either directly or indirectly in these companies.


1 There may exist some good reasons for keeping some of the underlying data anonymous, but I think it would be perfectly possible to find a good solution whereby the data was made available to all for calculation purposes but the actual contributor names and associated price, volume and metadata were kept anonymous and only known to the central systemic guardian. Of course you’d have to do more than just replace the bank name by some static code, it would need to be dynamically changing, different keys for different calculation agents etc. but all very doable I’m sure. You’d be amazed what smart kids can do with computers these days.

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Are (traditional) financial markets broken?

I don’t have much invested in traditional public equity markets, just a handful of relatively small positions in my (self-directed) pension fund. I haven’t done any robust analysis but my intuition tells me that my average holding period for these positions is probably around 2-3 years, with perhaps a bit of trading (lightening up or adding to existing positions) one or twice a year. And watching the markets from the sidelines over the past month or so certainly hasn’t made me regret this modest, passive allocation. When massive, mature companies trade up and down by 10 or 20% in a period of days – with no or little company specific news, confidence in the market’s ability to set prices in an orderly fashion clearly goes out the window. Indeed, the (public) equity markets are dangerously close to losing their ability to provide one of their key benefits: price discovery. And if/when this comes to pass, there will be serious knock-on effects on their other prime (and beneficial) function of capital allocation (and providing access to capital to companies and access to companies to investors.)

The risk is that a tipping point is reached at which the traditional public equity markets cease to be relevant venues for raising capital or investing. As many people have recently remarked (Kill the Quants Before They Kill Us, Beat high-frequency trading machines by not playing their game, etc.) possibly the key driver of this trend is the relentless increase in algorithmically-driven machine trading (high-frenquency or otherwise.) Now don’t get me wrong, I am neither a luddite, nor am I fundamentally opposed to these trading strategies; rather all other things being equal I would probably consider myself a proponent. In moderation, these types of trading strategies add both liquidity and heterogeneity to the market and as such help create a more robust trading ecosystem. But recently, the equilibrium of this system has come unstuck. Anecdotally, it is now assumed that upwards of 60% of trading volumes on the main public stock exchanges are accounted for by algorithmic/machine-directed trading. On some days and in some stocks, I understand that this can be as much as 80+%.

And most of these strategies don’t involve any judgement as to the valuation per se of a company; basically, as the Onion put it so brilliantly many years ago: they are just “trading” a “blue line”.

Blue Line Price History

NEW YORK–Excitement swept the financial world Monday, when a blue line jumped more than 11 percent, passing four black horizontal lines as it rose from 367.22 to 408.85.

So nobody is actually setting the price! (…or more accurately, the “price-setters” in the markets are mostly being overwhelmed by the trend-trading machines.) This does have the side effect of creating real trading and investment opportunities for on the one hand a small number of smart nimble day traders and on the other hand a small number of very long term investors (who have the luxury of having deep pockets and patience) but for the vast majority of investors (professional or private) the market dynamics and extreme short term volatility make participation more and more painful. This is particularly the case in a low-return environment such as today. Clearly execution (entry and exit points) have always been important, even to long term investors, but never have they been make or break like they have been in August: who cares if you have a carefully crafted investment thesis that predicts a 20-40% appreciation over 2-3 years in Company A when depending on the day of the week on which you entered the position, the thesis is rendered somewhat moot by a 20% swing in the share price.

And it’s no wonder that strong, growing private companies are often loathe to have their shares listed: what right-thinking CEO wants to deal with that insanity???

So what’s the solution? I don’t pretend to have an answer, but I do have a couple suggestions that perhaps point in the right direction for smarter people than I to develop into actionable plans:

  • design structural dampeners (through exchange rules and regulations) that limit the volume of algorithmic trading to some maximum proportion (to be A/B tested to find the optimal point – 40? 50? 60? percent?); this could also be a dynamic number, for example increasing or decreasing with intraday volatility to damp same
  • encourage the continued development of private secondary markets (SharesPost, SecondMarket and others) and help to develop them as real alternatives (and complements) to traditional public equity markets.

It’s really important that our global capital markets operate robustly and efficiently. In fact it’s never been more important. I believe that reasonable, robust solutions exist (or can be developed.) But I fear that the inertia and prejudices of entrenched incumbents (exchanges, banks, regulators, governments and investors) will make finding these solutions exceedingly difficult. I hope I’m wrong. Until then, be careful out there (and think about re-allocating some of your capital to the private markets; you’ll sleep better at night!)

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Markets in everything, part 743.

Markets in compute power, much talked about by me and others are now it seems finally here (from The Economist:)

Fundamentally, SpotCloud works like other spot markets. Firms with excess computing capacity—operators of data centres, cloud providers, hosting firms—put it up for sale. Others, who have a short-term need for some number-crunching, can bid for it. Enomaly takes a cut of between 10% and 30% depending on the size of the deal. But there is an important difference: SpotCloud is what Enomaly calls an “opaque market”, meaning that the firms offering capacity do not have to reveal their identity. Thus selling computing services for cheap on SpotCloud does not cannibalise regular offerings.

SpotCloud Screenshot

Our friends at Timetric are already tracking historical spot pricing for AWS, and I hope they’ll be able to do the same for the SpotCloud historical data.

Compute cloud spot prices, Amazon web services on Timetric.

Who says we aren’t living in interesting times?

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The end of [financial exchange] history.

I haven’t had much time to write in the last few months, part of the unavoidable occupational hazards of building a business and a company, but I felt almost obliged to comment on the latest round of major financial exchange consolidation as the author of the 2005 “Amazonbay” video

So what was my initial reaction? Completely underwhelmed. The question that immediately popped into my head was: “Is that it???” Is that the most exciting, most optimal path to future growth that these management teams and their armies of advisors could come up with? And if so, what next? Even theoretically, only one more iteration of the global consolidation game exists and I’m not sure anyone would really advocate for a monolithic NYSEEuronextDBCMESGXetc… So the question that still will haunt the new, bigger boardrooms is not answered but only postponed: whither future growth in an increasingly commoditized business??

Don’t get me wrong, it’s a hard question. I don’t have an answer either. But you won’t be surprised if I suggest that it is probably to be found in thinking about post-consolidation de-consolidation aimed at creating new companies focused on various horizontal layers in the stack. Indeed, if the only path possible to get to a very small handful of global core exchange platforms was this flurry of mergers, then perhaps it was not all in vain. I would accept that in this layer of the “exchange stack” there is truly economies of scale, much as for instance with core communication infrastructure.

But then I would suggest that management of these platforms then needs to focus intensely on dis-investing themselves of other layers of the stack where economies of scale are less in evidence or absent completely. I don’t want to be cynical but giving the combination of normal 20th century management dynamics (bigger is better) and the particular emotio-political aspects of the exchange business, I would be very surprised to see anything like this happen. If I were a shareholder of any of these companies my fear would be that any of the advantages that arise from these combinations are ultimately subsumed by the disadvantages engendered by complexity (in every dimension.)

Giant financial exchanges – like the giant banks – aren’t going to disappear overnight. Possibly never. But to frame the debate in this “new” vs “old” / “mammal” vs “dinosaur” context is to miss the point. There are dozens of good (and some less good) reasons why these incumbents will be very hard to dislodge, and to focus on this – while potentially entertaining – skirts around the really interesting question which is to ask: where (and by whom) will value be created in digital transaction execution and management over the the next decade or two?

I don’t envy the management teams that lead these exchanges – they are forced to operate in a highly constrained political and cultural space and having fairly recently lived through the golden age for their traditional business model would seem – at least in the short term – to have huge asymmetrical downside in terms of the world’s expectations for them. Not fun.

There are some very interesting opportunities for these giant trading platforms in the years ahead. I just think that things will have to get a lot worse first before the management of these firms are in a position to act on these opportunities and think laterally. Or should I say horizontally!

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The Financial Reformation

Last week I spent the week in Amsterdam at Sibos 2010 where I had kindly been invited by Peter Van der Auwera to participate in the Innovation stream, and in particular in the Cloud Computing and Long Now streams within Innotribe.  On Monday, I gave a short “scene-setting” talk on cloud computing and app stores in finance called The New Financial Stack (more on this / link hopefully later this week) and also I agreed to produce a video aimed at provoking and/or inspiring some original and non-linear thinking about the future of finance. Called “The Financial Reformation”, it sets the scene for two decades of fundamental change in the financial services industry based on the amazing democratising power of information technologies. I hope you like the result:

But as you might suspect if you have watched the video, this is just a start… Indeed, this initial video could be considered as simply the trailer for a longer form video which will look at the period from 2008 to 2028 in more detail; similar in some ways to the AmazonBay video of several years ago. The first draft of the script for this story is already written but I am very keen to build on and enrich it, not only with the fascinating concepts and insights that I absorbed in the Innotribe sessions at Sibos last week, but also – insofar as anyone is interested – with comments and ideas from the wise crowd of Park Paradigm readers. I’ve got a few ideas as to how best to go about this, and plan to post these later this week or next, but in the mean time if you would like to share your thoughts, please feel free to comment below.


ps I’d like to give a special thanks to the amazing team at Motherlode who were instrumental in turning my ideas into reality and who worked tirelessly to deliver the video in time for the world premier at Sibos;  I’d also like to thank and congratulate Peter, Kosta and the rest of the Swift Innotribe team for what was simply an incredible four days.  I hope Swift gives you the recognition you deserve!

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Bringing corporate governance into the digital age

You may have noticed, I haven’t been posting much here lately.  It’s not that I don’t have anything to say, probably just the opposite (!) but have be full out from dawn until dusk working on a number of exciting new projects including our own development (more on that in a few weeks.)  One project that has been front of mind the past few weeks is a new company we are developing that is directly inspired by Paul Graham‘s great advice to “solve problems that affect you directly”.

A bit of background.  When I was in banking, one of the achievements I was most proud of was effectively using web technology to transform how (debt) capital was raised (at least in Europe*.)  At DrKW, we built what for many years was the state of the art capital raising platform, whose core product was our eBookbuilding platform (now in Commerzbank yellow!)  It completely revolutionised what had heretofore been a disjointed, manual, somewhat ad hoc process into a seamless, collaborative, mostly painless process.  Initially it met with enormous resistance from other (much bigger and more successful) banks and syndicate managers, who as ‘guardians of the temple’ jealously guarded their power, derived (in their minds) from the information asymmetry they enjoyed (vs issuers and investors.)  However – and despite being at best a middling player in the fixed income new issues market – our disruptive technology was such a big improvement on the status quo that eventually the market adopted our standards (with everyone then rushing to build their own analogous platforms.)  In the spirit of making sure these platforms could ‘play well together’ we even published our XML-Schema for new issues and invited all our competitors to contribute to it and use it. (Which had the effect of basically freaking out our competitors.  They thought we were crazy – like Ali – because they didn’t have the slightest idea what it means to compete in a world of information abundance and platforms, but that story is for another day…)

Anyhow, when I became seriously and then professionally active in ‘venture capital’ or more generically speaking, in investing in private companies, the lack of technology available to manage workflows surprised me;  I was particularly puzzled because ostensibly this was a world populated with techophiles, early adopters and people who ate disruption for breakfast (quite unlike the world of institutional capital markets).  Further, there is much talk (and consensus) around the fact that it is hard/impossible to scale venture investing.  And while I think this holds at some level, it struck me that a significant number of the gating factors limiting the ability to scale could be vastly improved.  Not to infinity but substantially, perhaps by an order of magnitude.  Pulling out an example from my old career, when I started life as a bond trader 20 years ago (ack!) the number of bonds that a typical good trader could manage numbered in the dozens at best (and even then, you would find that a trader really traded 10 to 20 bonds 80% of the time and sort of went through the motions for the other bonds hoping most of the time not to trade.)  Then came Bloomberg.  And excel spreadsheets.  (And later bespoke pricing and analytic tools and platforms.)  And all of the sudden, a trader could manage a book with hundreds of securities.  There was still a degree of 80/20 but everything was an order of magnitude bigger.

I don’t know if our new initiative will definitely achieve that degree of change in the private investment market, but we are convinced that there is a better way and having a fit-for-purpose platform to help company management, non-executive directors and investors communicate, collaborate and manage their positions and responsibilities would be a huge step forward.  It’s not that nothing currently exists, but I would say we are at the ‘excel spreadsheet’ phase to use my bond trading analogy – with many firms and people starting to use things like Google Apps or Basecamp and the like to better manage information flows and collaboration.  But while this (and excel for traders) is (was) a good start, the real juice comes when dedicated, purpose-built platforms emerge.  If you have a screw that needs driving, a hammer is better than nothing (or a rock) but a screwdriver is even better!  (A power screwdriver better still!)

So we conceived of (what has been provisionally named) CiRX – the corporate director and investor relations information exchange:

CiRX is a purpose-built platform enabling private companies, directors and investors to communicate and collaborate more efficiently saving time, money and effort.  By streamlining processes and connecting stakeholders in an intuitive and context-rich environment, CiRX offers a tailored yet consistent solution to the challenge of managing information and documentation flows, reducing administrative burdens and creating opportunities for a richer, more dynamic and flexible approach to corporate governance and strategic management.

Over the past few months, we have been developing the concept, the business model and have done a significant amount of macro research to identify the potential size of the market opportunity and now have started to take the next step and ‘talk/think details’ as they say.  In order to support this next stage of development, as we are poised to start ‘cutting code’, we wanted to get more direct feedback from the community – of company executives and founders, non-executives, angel and institutional investors – to better understand how their experiences and perceptions were both similar and different to our own.  To do so we created a short(ish) survey and have sent it to a number of our contacts across all these communities, but if we missed you and you are a company founder or non-exec director or investor in one or more private companies and you are interested in contributing your views, you can find the survey by clicking here. (We’ll leave the survey open for a couple weeks probably but if you are so inclined to complete it, we are excited to be presenting CiRX at mini-seedcamp London next week so would be great to have as much feedback as possible before then.) Of course you are also welcome to share your views – good, bad and ugly – in the comments below.


* That e-bookbuilding (generic) never gained acceptance in the US (at least not while I was still in the market) is in my opinion a telling manifestation of the oligopoly of Wall Street (which gives us things like 7% IPO fees with the spooky consistency of North Korean election results) which absent the pressure of competition, allowed the dominant underwriters to resist this change tooth and nail.  It was even more glaringly apparent when these same US firms operating in Europe adopted e-bookbuilding as strongly as everyone else once it was obvious it was an evolutionary winner…

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We’ve been busy…

You may have noticed that I haven’t posted much in the last couple months and given all the interesting things going on in the world it certainly wasn’t for lack of material. Breaking my arm obviously didn’t help increase my productivity (or make typing very easy) but it wasn’t the main reason for the silence. It’s much simpler than that: I was busy!

Busy investing in a whole bunch of super exciting and interesting new businesses. Busy working on the sale of ODL Group (where I was the lead independent non-executive director) to FXCM to create a true global leader in FX trading. Busy working with my partner Uday and FT Advisors on a number of interesting strategic advisory projects, in particular focused on the electronic and algorithmic trading space. Busy helping two of our portfolio companies raise follow-on financing. Busy working on our own corporate structure and capital raising where I hope to be able to communicate some exciting news in the not too distant future. Busy.

So what have we been investing in? Here is a quick rundown (in alphabetical order):

  • Babuki – 2008 seedcamp winner, launching soon (will update) with an innovative platform for social gaming
  • BankSimple – “an easy, intuitive, and social bank for people who appreciate simple online services. Unlike other banks, we don’t trap you with confusing products nor do we charge any hidden fees. No overdraft fees. We use sophisticated analytics to help you better manage your finances by providing you a individualized service, catered to your needs and goals.” Recently got some attention when they announced that Alex Payne of Twitter fame has joined as CTO. They also got a great write-up from @maxableson in the NY Observer.
  • Blueleaf – investment information management and planning software “to help people like you see all their savings and investment accounts in one place; understand their financial information more completely, more quickly; securely share information and collaborate with spouses, family or advisors; save their data, even if they change financial institutions; and maybe most importantly, help them stay financially safe and secure.”
  • Timetric – builds services to make sense of time-series statistics, based on the Timetric Platform: a proprietary service for publishing, analysing, and performing calculations on very large quantities of time-varying statistical data. Have a look at this neat little demo website they have built for tracking equity portfolios.
  • Metamarkets – provides global, real-time media price discovery by aggregating billions of electronic media transactions in order to deliver dynamic price data, proprietary price and volume aggregations, and comprehensive analytic media market views to sell-side media principals.
  • [not yet closed - will update soon]

Over the next few weeks or so, I plan to do a proper write-up on each of these businesses and the reasons we think they have bright prospects. So watch this space.

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Our first exit (!)

Admittedly a very small holding (acquired via our investment in CohesiveFT) and with some mixed feelings (more on that below) but nonetheless an excellent result for an exciting and important technology and the team behind it led by the one and only Alexis Richardson…yes today SpringSource (VMWare) announced its acquisition of Rabbit Technologies – the company behind the world’s leading implementation of AMQP, RabbitMQ.

RabbitMQ was born of a JV between CohesiveFT (my partner Amy sits on their Board) and L-Shift and was spun out as an independent entity under Alexis’ leadership about a year ago. The mixed feelings I alluded to above are only because we were quite excited by the prospect of helping Rabbit grow as a standalone business, given their already excellent market share, the existing and extremely fast growing market for their product (messaging), the already strong brand and market adoption of RabbitMQ and a number of successful open-source business model pioneers and exits to emulate. As we did not have the capital required to make this happen we could not put a credible alternative on the table. To be fair, there were always a lot of moving parts and there is no guarantee that we could have put a better, workable deal forward and clearly joining the VMWare family is an awesome opportunity for the company and the team.

In any event, I’m really excited and happy for them and proud to be associated with them, even if only in a small way. Here’s to hoping this is a homerun deal for VMWare! (And yes having “Rabbit” in your name is one of our investment criterea…) ;)

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Markets in everything, Part 471: Hooray for Hollywood

The LA Times published an interesting article yesterday discussing the arrival of two new exchanges focused on helping hedge box office risk:

Two trading firms, one of them an established Wall Street player and the other a Midwest upstart, are each about to premiere a sophisticated new financial tool: a box-office futures exchange that would allow Hollywood studios and others to hedge against the box-office performance of movies, similar to the way farmers swap corn or wheat futures to protect themselves from crop failures.

The Cantor Exchange, formed by New York firm Cantor Fitzgerald and set to launch in April, last week demonstrated its system to 90 Hollywood executives in a packed Century City hotel conference room….

…On Wednesday, Indiana company Veriana Networks, which says its management includes “veterans of the Chicago exchange community,” unveiled the Trend Exchange, its own rival futures exchange for box-office receipts.

These are exactly the kind of novel risk management marketplaces that will continue to emerge over the next 5 to 10 years as technology enables robust, easy and cost-effective trading and settlement mechanisms and data (which is the raw material of any exchange or risk management toolkit) continues to grow in size, richness and availability across every sector of the economy. Indeed the greatest impediment to the development of such markets is cultural: there is still an irrational, sometime hysterical, aversion to any risk management tool that is non-traditional and can be characterized as gambling. Of course gambling, trading and hedging are indistinguishable in practice and can only be differentiated in context, and really only represent differences in intent. As such, it is very difficult to proscribe one while allowing the other(s). There are however reasonably good, tried and tested regulatory frameworks that have been developed over decades to manage unhealthy practices (insider trading, market abuse, etc.) in traded markets for outcomes and commodities. Using these, regulators should be happy to quickly approve as many new marketplaces or exchanges as creative entrepreneurs and traders invent and let a thousand flowers bloom. I don’t think it is for the regulators to second-guess who might be interested in trading such markets and why, as long as the market rules and framework are robust, transparent and participants are swiftly held accountable for any abusive behavior.

But that certainly isn’t the way the establishment sees things and even those that are developing new markets often see their market as an exceptional addition to the risk management landscape rather than a specific example of a more general case. (Although to be fair this may be simply a tactic to curry favor with the forces defending the status quo in order not to appear to be too heretical and so smooth approval for their specific new initiative.)

“The day that a widow or orphan bets against ‘Finding Nemo 3′ — that’s not a good day,” said Rob Swagger, Veriana’s chief executive.

Why? Why shouldn’t anyone be able to put their knowledge and insights to work to make a return. Why is it ok for a ‘widow or orphan’ to bet on GE’s future performance (by buying or selling their shares) but not to bet on the potential return of a film? It simply doesn’t make sense. Or the view that certain risks or outcomes are worthy of being traded and managed but not others?

Government authorities have generally approved only those futures exchanges that allow for the redistribution of a preexisting risk. Sports betting is not approved because, unlike a farmer selling a futures contract to offset losses from crop failure, neither party involved in the wager has an economic interest in the underlying event.

This statement is of course patently ridiculous. Many, many agricultural risk contracts are traded amongst principals who are neither producers nor end consumers, and to say that there is no ‘real world’ economic risks that could be managed via sports trading is just silly given that sports is an enormous, global business with hundreds of billions of dollars of capital at risk. And if that weren’t enough, it is happening anyways, with admittedly high risks of fraud and abuse. Wouldn’t it make more sense (in the context of protecting vulnerable market participants) to encourage regulated, robust, well monitored marketplaces rather than cling to the current Potemkin-esque prohibition? (Disclosure: I am a shareholder in Betfair.)

In any event, I can only endorse Cantor’s vision of creating a new, more vibrant and useful market for managing risk and structuring finance in the entertainment industry:

Now Cantor hopes for its exchange to be the first of many complex financing products for the entertainment industry. In one of the more ambitious plans, Jaycobs wants to team with filmmakers to create something like an initial public offering of stock in a specific film, staking out a potential new way to finance production.

And I hope they (and Trend Exchange,) working along side the CFTC are able to quickly illustrate that well-built and well-regulated marketplaces can mitigate the potential dangers while at the same time providing a powerful and useful set of tools for managing risk and generating returns. Perhaps this will help pry open the door to seeing more and more outcome markets develop of the course of the next several years.

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Probably the best start-up you’ve never heard of.

Today Markit Group announced that General Atlantic has invested $250 million, valuing the 7 year old company at a whopping $3.3 billion. Founded by Lance Uggla, Kevin Gould and Rony Grushka in 2003 to address the growing need for quality data in the burgeoning credit derivatives market, what followed was several years of unbelievably good execution and disciplined acquisitions which has positioned the company as a critical component at the heart of the trillion dollar OTC derivative markets. The products they provide aren’t considered sexy (something that is often given all too much importance in this status conscious industry) – but their data, valuations, indices, trade processing and other products and services are the plumbing that is key to the continuing operation of many financial markets. They are a great example of creating value by building a great platform and understanding how to monetize data. I had the good fortune to be a non-executive director from 2003 to 2006 and I can say without hesitation that this team is one of the best I’ve ever seen and fully deserve the success they have achieved. (Congratulation guys. Awesome, truly awesome.)

And I am certain there is more to come. Their primary constraint has and will likely continue to be the physical/logistical limitations of growing as fast as they have but each year they only improve and in terms of acquisitions the company they most remind me of (in terms of disciplined and deliberate execution) is Cisco. Besides, General Atlantic doesn’t invest in companies where they don’t think they can make 20-30% annual returns or more.

And yet many (most) people in the ‘start-up’/'tech’ scene whether in the UK or the US have never (or only vaguely) heard of Markit. (For example, I counted only about 50 or so tweets referencing the announcement today, less than for any TechCrunch launching start-up…) Why is that? Obviously I can’t say for sure but (in no particular order) would guess the explanation perhaps lies in the following:

  • not venture capital funded; funding initially came from it’s cornerstone customers, the investment banks, and then later from some very smart hedge funds
  • focused on the wholesale financial services industry (and not on consumer or media or other mass markets)
  • key products and services (and associated economics) unknown to those outside finance and even worse generally considered ‘boring’
  • management team laser focused on execution, not PR (although to be fair they had this luxury not needing to sell to the mass market)
  • and so folks like TechCrunch and VentureBeat don’t know or write about them (aka “if a startup isn’t listed in CrunchBase does it really exist?” syndrome)

Indeed for me, Markit is a poster child for the cognitive, cultural and expertise chasm that exists between ‘Wall Street’ and ‘the Valley’ (or the ‘City’ and the ‘Roundabout’ to use the less good UK-centric metaphor.) They might as well be on different planets. Indeed bridging this divide is at the core of what we set out to do at Nauiokas Park and was the driver that led Paul Kedrosky and Tim O’Reilly to launch the Money:Tech conference in 2008 (which sadly didn’t survive the financial crisis and quite frankly was met by a deafening indifference by the vast majority of the Wall Street side of the equation.)

And yet, the opportunities available to those who can successful bridge this gap are enormous. Well, anyway that’s what we think. And the crisis in venture capital ostensibly caused by too much capital? I’m going to disagree with Paul and Fred and suggest it’s not too much money overall; rather it’s too much money concentrated with too few investors, focused on too few sectors, who end up all chasing the same deals. So to the LPs out there my message would be: don’t shrink the pool, enlarge the opportunity space. Oh, and try to make sure you’ve got exposure to the next Markit Group.

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