I saw a piece a year or two back - in Business Week, before it shopped all its European customers the hideous digital edition - about “dark nets”, smaller, private networks of people who know each other and swap copyrighted content illegally. Because they’re private, the activity can’t be monitored the way P2P networks can. And so on. It all sounded terribly sinister until I realized that it’s jsut the stuff we all do.

I was reminded of this in the remaining session from yesterday’s O’Reilly Radar, which talked about Web 2.0 and Wall Street. Peter Bloom said that the big guns now have their own private exchanges, and an order only makes it out onto the open market if it can’t be matched immediately - that is, it’s not good enough for them. There are now 31 alternative trading systems dark pools of liquidity, and “14 families” (he didn’t list them all, but he did mention Citicorp, Morgan Stanley, and JP Morgan Chase) represent 95% of capital trading, and the market is driven on the buy side by hedge funds.  Also, in order to conceal what they’re doing, people with large orders break them up into tiny chunks - the average order size has declined to under 400 shares.

This is all of course huge change from as recently as the 1970s, when transactions were expensive (22 cents a share then, .02 cents a share now) and the talent, he said, was on the sell side - investment research was published and accessible to anyone. Now, research information has become a proprietary asset on the buy side.

Web 2.0 enables some interesting ideas around all this. For example, betting on the trader instead of the trade for short-term trading (the anti-Buffett approach). (Playing the man instead of the ball.)  Bloom mentioned a guy in Toronto who set up a system in which you start with $100. If your investments consistently pay off, he increases your capital allocation. But the point is “behavioral finance”, in which if someone’s a good trader you copy their trades; you don’t bothe r researching the securities they trade. He didn’t say this, but of course this is the promise managed funds have made for years - that their experts can produce consistently good results (which in general is not true - automated index funds generally do better). Bloom speculated that this approach could be extended to health care (treatments, outcomes, diseases) and consumer electronics buying - anything where people can benefit from collective intelligence. (I will refrain from mentioning collective stupidity; the idea behind this is to Darwinishly weed out the bad ideas and stupid choices in favor of the good ones.) He also mentioned valueinvestorsclub.com where you have to come up with good ideas that can be shared and rated on the site. In our conference bags are “dollars” for a project of his - an attempt to make a sort of eBay for charity funding.

Government is like the space program: it can’t afford to experiment. It’s hard to see how government could use these kinds of collective curation. But what about organised benefit fraud? governmentbenefitsclub.com?

wg