Learning from Financial Markets (Money:Tech, Part One)

I mentioned the Release 2.0 issue on Web 2.0 and Wall Street in my post about Warren Buffett yesterday. I thought I’d take up that theme a bit further, and explore some of the big ideas that fall out of the realization that Web 2.0 and Wall Street are both networked information markets.

The first key insight was that if the parallels between Web 2.0 and Wall Street are correct, we can divine some of the future Web 2.0 trends by watching what’s already happened on Wall Street. Financial markets are both much bigger and much more valuable than Web 2.0, and have been around a lot longer, but show many of the same patterns. Over the next few weeks, I’m going to publish a series of posts about some of the key ideas that really woke me up when I started exploring the parallels.

Here are some of the topics I’m going to be covering:

  • What Wall Street (and Google’s) quest for performance tells us about the re-centralization of the internet into massive data centers

  • How trading via “dark pools of liquidity” may give a foretaste of an internet where secrecy is valued more than transparency

  • How Wall Street firms increasingly “trading for their own account” rather than on behalf of clients predicts and explains many of the current strategic moves by Google and Amazon

  • How the breakdown of traditional investment research is creating new opportunities both for aggregators of unique types of internet data and for a new class of investment research firm

  • How innovative Wall Street firms are “harnessing collective intelligence” for trading

  • How the recent sub-prime meltdown might suggest futures in which internet-style collective intelligence applications could also run out of control

  • How the development of real-time data sources can also lead to the development of new financial instruments (e.g. weather futures), and potentially, new sources of revenue for companies aggregating that data

In addition to this series of blog posts, we’ll be exploring all this and more at the Money:Tech Conference in New York February 6-9. (See also my original post about the conference, back in August.)

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  • http://michaelbernstein.com Michael R. Bernstein

    There is also an implication that there ought to be a market for financial collaboration and decisionmaking in-the-small tools (ie. Web 2.0 tools for investment clubs).

  • Tim Ullrich

    It will be interesting to see how financial firms deal with Web 2.0 as there are compliance issues that make great ideas unworkable.

    For instance, if firms have user-to-user advice hosted on their site, where they might also have ads for their products (Zecco.com for instance), will this lead to lawsuits down the road? It should be taken for granted that eventually someone will make trades on this advice and (in their mind) blur the line between the firm merely offering hosting space for opinions and the firm offering the opinion. From these lawsuits we will get even more regulation and compliance issues.

    What about user-based due-diligence reports and real-time updating of the research done by users? Sounds like a great idea (that I just thought of actually, pay me later) but while the coding isn’t complicated, the compliance issues around such a feature would be.

    If anyone has wondered why great features are often missing from some sites it is because of compliance. Live-chat is an easy example as it is a seemingly win-win feature; unfortunately having to keep all client-to-firm communications on record complicated the process and has left only a few hardy firms offering the tool (although it is on the rise as of late).

    These are the things that online brokerages (for example) have to deal with and it helps explain why they are lagging behind other industries in offering fancy user-to-user features. There is also the end-game to think about; by adding such features, how does it add value to our company?

  • http://gregiorylent.com gregory

    ha, i forgot about weather futures…. when bar room bets are rebranded as a financial instruments, you know we are in trouble… house of cards….

    maybe include an article on systemic stability and confidence… because when (private) data collection equals bucks, confidence drops, don’t you think….as an extreme example, take east germany, prior to the wall dropping…

  • http://www.peakseekers.in/ Ajeet Khurana

    “trading for their own account”: I think this has as much to do about opportunity creation at the boundary of a growing trend as it has to do with the desire to own the “platform.” Not just on Wall Street, but also in the days of yore (if that is right expression for really olden times), was this trend visible.

  • Alex Tolley

    Tim – “How Wall Street firms increasingly “trading for their own account” rather than on behalf of clients predicts and explains many of the current strategic moves by Google and Amazon”.

    Wall Street firms started trading on their own accounts when it was preceived that they could make more money doing this via proprietary techniques than taking commissions from stock advice. The 1970′s commission price deregulation eroded the advice commissions and the 1990′s banking deregulation that gave firms access to huge pools of capital sealed the deal.

    The dark side however, was that firms could trade with the knowledge of their clients trades too – thus benefiting from “front-running” trades.

  • http://www.opendemocracy.net tony curzon price (OD, London)

    I think the parallels between markets and Web2.0 go pretty deep – both are essentially about aggregating information and ranking value.

    I think that _every_ piece of econommic theory will find its counterpart in studying web2.0. I made a start at this here, with “das Google Problem”: how far does the invisible mouse require well-ordered information (virtuous behavior) for an aggregation to be for the best (Adam Smith’s Invisible Hand) … and how far does the system reproduce that well-ordered behavior?

    The collective intelligence applications are already out of control – wikiscanner has done wonders to take the lid off to see show us how our knowledge ha become the object of “micro-lobbying” … with another parallel from the world of economics.

    Great theme.

  • http://tim.oreilly.com Tim O'Reilly

    Alex Tolley –

    Absolutely. That’s exactly the argument that Bill Janeway makes (as quoted in the release 2.0 issue.) The question (which I intend to write about over the next couple of days) is about how Web 2.0 firms are now exhibiting this same behavior.

  • http://michaelbernstein.com Michael R. Bernstein

    Hmm. That’ll be interesting. The obvious (to me) example would be if Google was using Adwords+Adsense data to detect linkfarms and link arbitration sites and downgrade their search relevance, but I haven’t heard anything to that effect.

  • http://michaelbernstein.com Michael R. Bernstein

    Gah. I meant ‘search arbitrage’ not ‘link arbitration’.

  • http://www.michaelramses.com Ramses

    1970′s commission price deregulation eroded the advice commissions and the 1990′s banking deregulation that gave firms access to huge pools of capital sealed the deal.