Subject: Re: Tom W. Bell paper
From: Don Marti <>
Date: Fri, 1 Sep 2006 18:47:30 -0700

begin quotation of Sat, Sep 02, 2006 at 04:23:35AM +0900:

>  > 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.

So you invent a lead-to-gold machine and start
buying lead and selling gold.  Just thinking common
sense here, you'd want people to be able to do that
even without a SPEX.  I understand the point of
not allowing people to make a trade that breaches
their duty of confidentiality to an employer, but
not the point of calling something "insider" trading
when it's information that the trader discovered or
invented independently.  Don't we want the laws to
provide incentives for people to discover and create?

> 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.

So you'll have an incentive to use a discreet broker
who also handles the accounts of many people on the
other side of the deal from you.  Seems doable enough.

>  > 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.

The exchange would have to cover the drafting of the
initial spec for the market, but some markets would be
launched once and never see a claim.  (The inventor
could be required to fund the testing of his or her
own invention, as claimants to The Amazing Randi's
prize are now.)

> 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.

Yes, which is the same problem we have now with the
patent system.   An advantage of the SPEX system here
is that multiple exchanges could compete to lower
costs, while a Patent Office has to be a government

> 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.

Don Marti                      LinuxWorld: August 14-17, 2006, San Francisco