Tuesday, April 24, 2007

Market Makers

A new company, Trendio.com made it's debut on killerstartups.com today. "Trendio takes the high pressured, fast paste(paced) world of the stock market and turns it into a game. Instead of actual stocks, key words are used as the trading item. The amount of times that name or word is mentioned in the news the next day determines how well those stocks are doing." But unlike a real market, these participants are unable to generate any material gains.

Although it isn't exactly the same, it reminded me of two other recent(ish) start-up that were exchanges themselves in weather and professional athletes, respectively.

"Basically the way they make money is Weatherbill's algorithm will usually be better than you at guessing the variance of cooling/heating degree days, so they can price their contracts with a premium. The small risk of error they have calculated and already sold to masticulating hedge fund analysts in NYC. Their premium is going to eat into your profits no matter what -- it's decided by the insurer, not the market. This is why people use insurance for low-probability, high-impact events and futures for high-probability, low-impact events (like weather); you just keep getting screwed by overhead otherwise. "(DL)

The third example of this created market, and more similar because of the not REAL money being traded in it, is protrade.com. Protrade sets the athletes prices and people (investors) trade these athletes based upon the fantasy points they think they will achieve during the season. Price move up/down based upon trading pressure. Then the season ends with earnings day. Unfortunately these earnings are in FAKE dollars. Because of all the online gambling laws, Americans are unable to recklessly throw their money away online, yet can do so with other markets (NYSE, Nasdaq, AMEX...Shanghai Stock Exchange) and find forms of gambling without much effort.

I am definitely a fan of these types of start-ups. In "Trading Is Taking to the High Seas: Freight-Rate Swapping Lets Investors Wager On Costs of Shipping" By Ann Davis on January 4, 2007; Page C1 of the Wall Street Journal, we see that investors are always looking for new alternatives to invest or gamble on, in this case it is tracking the timing of shipments and buying contracts on the amount of time they will take to be delivered.

As an investors you might be in a tough position because the arbitrage opportunities might become eaten up by the high premiums on the contracts. But my good friend DL suggested "However, if you think like an entrepreneur you realize that you can do this with basically any security, repackaging it using Ajax to seem like a new offer. You could do this with options, with swaps, even with **** like treasuries. "Buy ***** School community bonds!! Customize your issue based on your kid's AP score! We will only take a 10% premium for making you feel cool." Schmucks will line up for X number of months, and you are guaranteed money."

I would look to leverage long these market makers, especially if they get the ability to allow investors to use REAL money.

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