Re: e$: Geodesic Securities Markets

I don't really want to thrash this out point by point, but I will anyway ;-).

>Perry Metzger says:
>>Robert Hettinga says:
>> Strong crypto accomplishes 1, and e$ protocols make 2 and 3 meaningless.
>
>Not really. Not all commodities are fungible.

Agreed. And?

>Not all entities are
>willing to conduct all sorts of trades with all other sorts of
>entities.

No, but buyers of a specific security might want to buy those securities
from those who hold them...  Could you elaborate on your comment, please?

>Besides all that, someone has to hold physical goods,

Unless it is a stock, bond, derivative, call option, etc.  Most of which
are "held" in offsetting book entries at brokerage houses, banks, and
clearinghouses. If it's not kept there, then you need a certificate of some
sort (though I'm hard pressed to have heard of a certificate for a call
option, say), which might as well live on a hard drive as a desk drawer. I
guess I was saying that it could be that a "certificate" on a hard drive
was as tradeable, as "liquid"? as book entry in a clearinghouse.

>and
>investing will continue to be a realm for which expert advice is
>purchased.

I thought I did say that people like portfolio managers, anal(ah, I
*didn't* say *analysts* back there... OK. There.  I said "analysts")lysts,
investment bankers etc., still played their usual roles.

For example, a market analyst essentially sells his time to a brokerage
house to write reports on securities.  Those reports are then "sold" to the
brokerage's customers in exchange for brokerage fees.  They don't have to
work for brokerage houses any more, even. In the institutional markets, it
is now a common practice for some percentage of a commission to go on a
soft-dollar basis to third party analysts for their work.  (There was a
time 10 years ago or so where portfolio managers were getting *junkets* to
investment "seminars" in tropical locations on soft-dollars.  They don't do
that much anymore, I'm told.)  In an e$conomy, you sell your reports
direct.  Newsletter writers do it already.

Our "Peter Lynch" (forgive me Mister Lynch, I take your name in vain)
successor sitting in Marblehead would do some background e$ transaction to
have the report stuck on the screen of his trusty UltraPowerMac VXXI (next
to a Ren-N-Stimpy rerun) as soon as it came out.

In that case, as we said before, the mutual fund is where the investment
advice, the "editing" *is* being purchased.  But if an individual, or even
a professional trading his own money for his own profit, wanted to trade,
he only need put up one of two things to do so.  Money if he's buying, of
the securities if he's trading. In either case you don't really need a
brokerage firm for that...

Thanks Perry.

Cheers,
Bob

-----------------
Robert Hettinga  (rah@shipwright.com) "There is no difference between someone
Shipwright Development Corporation     who eats too little and sees Heaven and
44 Farquhar Street                       someone who drinks too much and sees
Boston, MA 02331 USA                       snakes." -- Bertrand Russell
(617) 323-7923

Robert Hettinga says:
> I don't really want to thrash this out point by point, but I will anyway ;-).
> 
> >Perry Metzger says:
> >>Robert Hettinga says:
> >> Strong crypto accomplishes 1, and e$ protocols make 2 and 3 meaningless.
> >
> >Not really. Not all commodities are fungible.
> 
> Agreed. And?

And the result of that is that intermediaries are needed in such cases
to handle the transactions if the things being traded are complex
instruments. Its fairly easy to envision a system that directly
matches orders for shares in IBM. Trying to match up buyers and
sellers of swaps might not be that easy.

> >Not all entities are
> >willing to conduct all sorts of trades with all other sorts of
> >entities.
> 
> No, but buyers of a specific security might want to buy those securities
> from those who hold them...  Could you elaborate on your comment, please?

Certainly. In the foreign exchange market, for instance, most trading
is done on blocks of millions to hundreds of millions of dollars worth
of currency. In the current scheme of things people will only deal
with entities that they know because fails are devistating. It is
possible for third parties to guarantee credit to open up markets, but
they will expect to be paid for this. You can't get rid of the banks
-- someone has to guarantee that you have the money on hand.

> >Besides all that, someone has to hold physical goods,
> 
> Unless it is a stock, bond, derivative, call option, etc. Most of which
> are "held" in offsetting book entries at brokerage houses, banks, and
> clearinghouses.

Actually, even in the case of securities largely settled by book
entry, DTC still holds physical certificates. That is not, however,
the point. The point is that no matter what you hold, be it dollars,
shares of IBM, or futures contracts for dried silkworm cocoons (a
perfectly real commodity, by the way) you need a bank to hold the
account and guarantee the existance of the thing being held, be it a
figment of the computer's memory or a thing backed by a bar of gold.
The banks will expect to be paid for this service. Try imagining a
digital cash algorithm that DOESN'T involve a bank, and you will
swiftly see that there is a small problem involved...

This is not to say that transaction costs can't be radically reduced,
and the role of intermediation in fully fungible goods reduced.
However, transaction costs will not go to zero, and banks will not
disappear. (I suspect conventional interest bearing accounts may be
fully replaced by mutual funds at some point, however.)

Perry