Financial Services - Serious Change Ahead

Erick Schonfeld over at B2Day points to a video made by Sean Park, head of Digital Markets at Dresdner Kleinwort Wasserstein.  The video - which takes a while to load - looks at:

"...what would happen once the Internet truly starts to change the business model of institutional financial markets beyond just online stock trading?...a scenario of how eBay will enter the financial markets, merge with Amazon, enter the sports betting business, and kill the margins for Morgan Stanley, Lehman Brothers, et al. It's all speculative of course, but fun to think about..."

Actually, the part I found fascinating was Park's vision of sports betting becoming basically another stock market that you could invest in.  Park explains:

Was the inclusion of Sports betting or trading just for fun? Do I really think sports hedge funds might come to pass? That sports could become yet another asset class?

I do think sports it will become a very significant market in its own right, without having a specific view as to its exact position (in terms of volumes or importance) versus more traditional asset or information markets. (Apparently I’m not the only one that thinks sports hedge funds are viable, I thought I was the first but after I published my original AmazonBay article last June, my brother pointed out this post on Mark Cuban’s blog that pre-dates me by several months!) The biggest thing holding this market back is the cultural and semantic perceptions of people, especially in the United States, with respect to betting or gambling. Dealing in stocks or bonds or even commodities is seen as ‘investing’ or ‘trading’ or ‘hedging’. Dealing in the outcome of a football game or the winner of an election is seen as ‘betting’ or ‘gambling’. Why?

In my eyes the difference between investing and gambling, betting and trading lies not in the underlying but in the approach of the person dealing in whatever instrument. Investing or trading involves a careful and analytical approach to decision making and risk taking. Betting or gambling involves a purely impulsive or emotional speculation. The irony is that many ordinary people are much more informed about sports or politics or the weather than macro-economic trends or the financial prospects of this or that company, and yet are encouraged by the prevailing culture and legislation to risk their savings investing in the latter through bonds or stocks while being chastised and in many cases legally prohibited from seeking to profit from their detailed knowledge of particular sporting or political outcomes.

Given that this semantic gap is largely driven by culture, religion and emotion, it is extremely difficult to speculate as to when - if ever - it may change, again especially in the US. However, I think it ultimately will if only due to the borderless nature of the internet; it is already happening in the UK and increasingly elsewhere. For instance, it is estimated that Betfair ‘traded’ just under $10bn in volume in 2005 and regularly executes between 2 and 5 million trades a day which is more than any financial exchange in the world (and this without accepting any business from the US - clearly potentially the biggest market in the world.) The market in Europe alone is predicted to top $150bn. I think it will become hard for the US stay aloof. Another factor that will drive this in the longer term will be generational change. The digital generation now growing up I think will not have the same historical prejudices as to what assets - real or virtual - can or should be traded. Indeed, sometime in the next decade or so I would expect ‘prediction’ markets more generally to become ubiquitous.

I think he's right on the money.

Comments

[steven davies]

Every financial institution should provide secure RSS feeds for customer communications. Otherwise, sadly, they'll probably be forced by a governing body like the NASD to only send emails with no links in it - moving the financial trading services industry back to brochure ware. Come on people wake UP.