Subject: Re: Tom W. Bell paper
From: <stephen@xemacs.org>
Date: Sat, 2 Sep 2006 04:23:35 +0900

Don Marti writes:
 > begin stephen@xemacs.org quotation of Fri, Sep 01, 2006 at 02:56:48PM +0900:
 > 
 > > looking at here is a large collection of individual securities,
 > > subject to "events" that could imply swings of hundreds of billions of
 > > dollars---and the inevitable bankruptcy risk on the side facing the

I've admitted elsewhere that this was a brain implosion.

 > > Another problem you're going to run into is that by definition you're
 > > looking at insider trading (another form of monopolistic
 > > exploitation).  If insiders can't trade on their information, how are
 > > they going to use this market to fund completion of their research?
 > 
 > This morning, a corn farmer in Iowa came in from
 > inspecting his crop and made a trade on a corn
 > futures market.  He has information about that corn
 > that nobody else has, or may ever have.  Meanwhile,
 > a speculator in London, England, made a trade on the
 > same market.  "Insider trading" is a peculiarity of
 > public companies.  Other kinds of markets use "inside"
 > information all the time.

This analogy is broken.  "Insider trading" as defined in the
securities laws is trading while holding information important enough
to guarantee a big, immediate, favorable movement in price.  Your Iowa
farmer doesn't have that kind of information.  Ron Rivest, on the
morning RSA filed for their patent, did.

Whenever one sells "invention of a public key algorithm" shares,
people will assess that he knows something they don't.  This will
force the price down, perhaps to zero if he is a recognized expert in
the field.  So "players" in the crypto field will engage dummies, etc.,
to hide the identity of the actual traders.  This is not going to be a
very transparent market.

 > Transaction costs will probably be between the patent
 > system and the existing futures markets.  They'll have
 > to be a little higher than regular futures markets
 > because there will need to be a unique set of referees
 > and protocol per contract.

I think you're greatly underestimating the fees that will be charged
by competent referees, who will be in very short supply unless the
number of contracts is small.  You're also ignoring the costs of the
expert consultants who will be demanded by investors for every new
contract, and who will have to be on retainer (or salary) to evaluate
every piece of technical news.  There are also substantial costs of
making new markets per se.  The majority of these markets will be
horrendously illiquid, which will greatly increase risk, and
implicitly transactions costs.  Not to mention the opportunity cost of
all those smart people doing well- and regularly-paid referee and
consulting work rather than risky R&D.

Again, it *could* work well.  But it's going to be a lot more costly
and less efficient than one might hope.  Perhaps enough so that the
patent system can give it a good run for the money, at least with a
few of the reforms that have already been proposed.

Steve