Thursday, 7 June 2007

Issue 8 - Supermarket

28 May 2005

The NYSE on Wall St - specials on cauliflowers in Aisle 10?

OK - it's time for a big prediction. I think the famous New York Stock Exchange on Wall Street will be shortly be a Supermarket. It's a long and potentially dull road to this conclusion, but if you can handle reading a few words without any gratuitous photos, then you are welcome to bear with me.

The history bit:

The NYSE has been on Wall Street since 1792, when it was a scruffy meeting place for dodgy merchants, trading goods under the buttonwood tree next to the wall built to keep the English and Indians out. In more recent times, it has became the symbol of modern capitalism, as the place where trillions of dollars of available capital (i.e. cash) move around every day in exchange for slivers of ownership of the world's largest companies.

The Michaelnomics bit:

The point of capitalism is that it allows those with spare cash (i.e. free capital) to give it to those with good ideas but no cash. In this way, the best ideas get the most funding so they can happen, and the worst ideas get all their cash taken away from them so that they fail. I like to think of it as Darwinian natural selection with money (and who doesn't find money sexy - or is that just me?).

Michaelnomics as an example:

Many people think Google is a good idea - sole ownership of the best internet search algorhythm, innovative thought leaders in the industry, potentially substantial source of income from internet advertising, and a reasonable approach to spending money by management. Google's shares were offered for the first time last year, and everyone wanted to buy in to a good idea, generating an instant market valuation for Google of 23.1 billlion dollars. That's a lot of searches for that Paris Hilton video if you ask me (and shame on you if you know what I am talking about there - unless you've seen it, in which case, is it true she has less talent than that dog-rat thing she lost?),

At about the same time, Enron's business model appeared to consist of taking all of their spare cash and gifting it to their Management by way of secret and complex trust arrangements hidden on Carribean islands. This is most people's idea of a bad idea (apart from the Enron managers who thought this was a fantaaaaaaaastic idea), so Enron not surprisingly had trouble raising more spare cash from anyone, and they went broke.

See, it's like natural selection - bad ideas, like gazelle who are can't run (and Wimbledon football clubs), get killed off, and the strong ideas are left to survive and breed other little ideas.

Actually that was an aside - did you enjoy it?

Now what's missing from that very idealistic approach is the Michaelnomics concept of "economic friction". Economic friction slows the free flow of capital and diverts a share of the economic energy in the direction of those who place themselves in the path of the transaction. In the world of physics, a television gets hot because of the friction involved in turning electricity in to a picture capable of turning a man-puppy-thing into a statue at more than 30 paces - the less heat involved, the more efficient the process, and the less electricity required to generate the stationary-man-puppy-thing-effect.

The most obvious form of economic friction is the concept of commissions (if you are government-employed, this is called corruption). For every transaction (e.g. the purchase of a TV, buying or selling shares on the NYSE, or giving money to the Pandas through the WWF), there is a fee to pay to everyone who handles the goods and the cash. This fee is really a tax on the system - hence it hinders the free flow of capital like a handbrake hinders the abilty to take off at speed from the traffic lights. In short, one dollar given to an idea should result in the idea receiving as much of the dollar as possible (in a perfect world, the Panda would be able to sue for its full dollar). The more that dollar is lost through friction, the less chance little ideas have of surviving.

The point - economic friction at the NYSE:

The NYSE operates an open outcry system, similar to the way cattle is sold at market. The problem with the open outcry system is that there are a lot of people dressed as brightly as peacocks, all shouting, and therefore a lot of peacocks shouting but not listening. With any such system, there is an excellent chance of the buyer and seller thinking they agreed to different things. When a trade takes place, minions who work for the peacocks pick up all the "buy" and "sell" tickets and try to match them. Where they don't agree, there is an "out trade", which takes all sorts of reseach to sort out. The costs of peacocks, minions and out trades (and the ridculous bonuses for the CEO of the NYSE) need to be recovered from the commissions charged on each trade. One thing is for certain - no matter how much you make or lose in share trading, the peacocks never lose a penny.

Now, the peacock system works for tourists and TV video bytes, but it's a not that efficient. Actually, as it turns out all the other major exchanges around the world have already cottoned on to this fact, and have moved to screen trading, where buy and sell orders are matched automatically. This means you don't need a great big hall, peacocks, minions or out-trades. Trades are matched in split-seconds, with the details 100% matched - which of course means transaction costs (and therefore, commissions) are lower. So as it stands, the NYSE, the home of Western Capitalism, is actually one of the least efficient capital markets in the world.

Archipeligo - the NYSE dragged kicking and screaming in to the 21st century:

Last month, the NYSE (against the wishes of the peacocks - these peacocks are pretty well-connected parrots) agreed to merge with Archipeligo Exchange - an electronic trading platform. This has to be the first step in the phasing out of the open outcry system, and minimising the economic friction within the NYSE.

So, let's follow the logical progession here:

1. NYSE merges with an electronic trading platform

2. No-one needs the peacocks who used to strut around being annoying, charging huge commissions for something a computer can now do with e-mails. The peacocks go back to selling furniture in Jersey and stationery in Brooklyn.

3. The NYSE trading hall goes quiet - all trading is now done electronically

4. The banks and brokers work out that rent downtown is pretty expensive given electronic trading can be done anywhere. They move their offices to lower cost and higher security locations in Cincinnatti and Bangladesh.

5. With the banks gone, more and more offices downtown are converted to lower-cost residential apartments.

6. With a higher residential population, product and services will follow, such as hairdressers, plant shops, and (of course) supermarkets.

7. Supermarkets need "big bang" retail space and the largest space around is already empty - the NYSE trading hall.

8. Some time in 2009, Whole Foods moves in to the NYSE space. Cauliflower specials follow shortly after....

You read it here first.


Just a PS to this (dated 31 May)

Newsweek will run an article in their June 6 edition saying exactly the same thing: I'm going to need to set up tracking software and start posting copyright notices to stop the big guys from stealing my material a day after I post it!

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