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Sunday, May 02, 2004

Market Efficiency: Can Financial Markets Learn from EBay?

Fund manager (and former chairman of a division of E*TRADE) Doug Steiner, in an article in this month's ROB Magazine, recounts how he and his partner went ga-ga over EBay and Google AdWords when they looked high and low for great examples that might be used to spur reform in the financial markets.

After reviewing the sorry state of real financial markets in living up to the market ideal of transparency in pricing and non-favoritism in rules and policies, Steiner looks at EBay and AdWords, concluding that "like eBay, Google provides a venue, transparency and customer traffic. ... So, the fittest and boldest are surviving on-line by minimizing price spreads and maximizing transparency and efficiency. Why is it that financial markets are only accepting this idea under duress?"

Of course, this isn't quite true. A recent letter to the editor of Business 2.0 zeroed in on precisely this point, criticizing the pro-EBay bias in a recent Biz 2.0 article which spoke of this level playing field. The correspondent, a project manager for Sears.com, assured readers that EBay was in no way a level playing field, insofar as he had not only met with EBay's VP of Sales as well as its CEO, but also had ongoing access to tech support, sales strategy support, and a range of perks and advantages that didn't accrue to "Joe Schmoe selling his 14.4 drill." Similarly, although the rules and policies of AdWords apply equally to 99.5% of advertisers, I don't see it written down anywhere that they must apply to all advertisers. This is why Google's careful not to set too many rules that are too easy to pin down. Rather, they base everything (such as minimum clickthrough rates and pricing for AdSense) on "proprietary formulas." Part of the reason for this may be so that they can more comfortably just toss the rulebook out the window for their top twenty or so revenue generators.

But the playing field is still pretty darn level, and as a result, it's unleashing a flood of more efficient trade, be this in Royal Daulton figurines or the buying and selling of advertising. No wonder EBay + Google are worth a good $40-50 billion. If anyone's wondering what might be around the corner for companies such as these and the Internet sector in general: it's pretty easy to boil it down. Unleashing massive efficiencies in industries where massive inefficiencies still exist is something that will keep happening. Google might just pick an industry and have a go at it. As Larry Page commented in Google's recent unorthodox IPO filing: "Do not be surprised if we place smaller bets in areas that seem very speculative or even strange." Or, perhaps, bigger bets in very familiar areas like, say, the financial markets themselves(!) where the only strange thing is why some Stanford Ph.D.'s haven't taken them over yet.

Steiner concludes with:

"Next month, I'll continue with a goofy, yet all-too-true, comparison of shopping on-line for advice from psychics versus buying a standardized commodity that is traded in the billions of dollars every day: Canadian bonds. We'll see what dealers and regulators are doing--or not doing--to get you the best price."

LOL! You rock, Doug!

Posted by Andrew Goodman




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