Wacky, But Serious: What would it take to set up a stock market?
So, I was reading Matt's post about VC, which saw me following this link:
http://weblog.raganwald.com/2005/03/are-you-thinking-of-working-for-start.html
Raganwald States:
"A VC is having a good year when one in five investments hits a home run. If you honestly can do a better job of picking winners, drop your day job and go into venture capital. You’ll make way more money investing in start ups than working for them!"
I tend to agree, but of course I don't have the "fuck you" money to try my hand at VCing. What I need is a market that allows me to invest little bits of money into new ventures... What I need is a stock exchange, version 2.0.
So, I googled "what would it take to set up an online stock market" (I know, worst query ever) and I found this:
http://www.globalchange.com/stock.htm
Some wishful thinking, but interesting. What does HN think? Could a bunch of Hackers legally set up an alternative to stock markets that would work?
I'm fully aware that this idea is out to lunch, but I'm interested on hearing other people's opinions.
77 comments
[ 3.0 ms ] story [ 164 ms ] threadTo be perfectly honest, reading this was quite a shock, though. This is (loosely) the idea I have outlined for RailsRumble 08, coming up this weekend. Ours will not (at first) involve exchange of real money, but the concept will be the same: 'Normal' people will be able to choose startups they find promising and invest in them.
There're certain situations where you need to be an "accredited investor" (liquid net worth > $1M) to take money from the public. I know hedge funds are one of these; I think private companies are another. If a private company has more than a certain number of shareholders, they need to file disclosures as if they were a public company; this is why Google went public. These protections were put in place after the crash of 29, when a great many ordinary investors lost their money investing in companies that weren't much more than a piece of paper.
Again, talk to a lawyer. This is one area you don't want to dick around in without good legal advice.
I'm guessing that it has everything to do with a real return not being guaranteed. Same goes for Prosper.com and MicroPledge. Anyone can raise money for anything on the Internet: folks do whip-rounds via Paypal to buy friends a new laptop. But if you want the legal guarantees of stock ownership, etc, you need to file the appropriate disclosures.
</not-legal-advice>
http://www.prosper.com/help/topics/lender-quiet_period.aspx
You need to be an accredited investor to put money into a hedge fund.
Anyway, what the world really needs is not a new stock market but rather a new banking system.
Seriously, talk to a lawyer.
The most difficult thing to do in getting a stock exchange off the ground is not developing the software, but developing trust and liquidity. To do this, you need market makers - people who are obligated to provide buy and sell orders that keep the markets liquid. This is very very expensive.
We actually had an operating stock and commodities market, where you could trade the world's top currencies, gold, silver, platinum - for about 6 months, then 9/11 hit and it became very difficult to maintain the kinds of banking operations necessary to run an underground stock exchange.
The types of contracts involved in initial investment in an idea or company aren't fungible, and tend to be highly customized affairs between the VC, the founders, and their lawyers.
Yes, but maintaining liquidity in a dynamic environment probably requires market makers, no? I don't think there's an algorithmic solution. You need the specialists.
1.) Keep two heaps, a min-heap for sellers and a max-heap for buyers. The top of the seller heap is the "ask price". The top of the buyer is the "bid price". The difference between them is the "bid/ask spread".
2.a.) When a limit order comes in, put it in the appropriate heap. Then compare the tops of the heaps. If the prices overlap, send a fill message to the parties. Pay attention to quantities; you may have to send a partial fill to one party and a fill to another, and then repeat the process with the next order in the order book.
2.b.) When a market order comes in, immediately pop the top of the opposing heap and send out the appropriate fill or partial fill message.
That's basically it. Depending on language, you're looking at anywhere from a page to a few hundred lines of code. An actual stock exchange is a bit more complicated, since it has to handle things like order cancellations, cancel-pending messages, transaction logs, and fault-tolerance, and has to operate on thousands of trades a second with minimal latency. But conceptually, it's simple.
(And if Joshua corrects any of this, listen to him and not me. He was an actual quant; I just worked at a financial software startup.)
Many exchanges are well documented, from internal workings to protocols. Check out XETRA, LSE, etc. NASDAQ too, but it's more complicated.
The problem here is going to be achieving regulatory compliance and then liquidity. Both of these are harder.
http://sourceforge.net/projects/fse/
What I'd like you to do is to think about the effect you intended to create by quoting Einstein. Then constrast this with the effect that would have been created had you quoted someone obscure.
Good luck.
It's still illegal here though, the US government will find a way to shut down any kind of innovative online market.
What about a non-equity market to finance businesses? Instead of selling equity shares, you are paying money to a company (and a broker) for the opportunity to bet that company will achieve a certain level of income in a certain period? You'd be able to bet both with and against that company. The former would be equivalent to bonds.
There does, however, need to be a niche market between VC and IPO where early investors could get a much easier exit.
Edit: you also need a ton of capital coming in so it can be liquid.
Makes me wonder if we would even need VCs at that point anymore.
What might be a better idea is to let people put small amounts of money into a fund. Then, let startups apply and the fund members could vote on winners ... sort of YC-style.
For all I know that could fall under SEC regs too.
Maybe you could start by setting up something like http://intrade.com. First you just let people bet on whether a company would succeed or not by some metric. If you get enough people interested and knowledgeable about the companies you're dealing with, maybe you could lead that into funding.
New exchanges have been created by private companies in the past, although typically (AFAIK) with large infusions of cash from major banks. IntercontinentalExchange (http://en.wikipedia.org/wiki/IntercontinentalExchange, http://www.theice.com) is an example, although it focuses on commodities, rather than stocks.
Where exactly is the line drawn here...
Unfortunately, induction only works in mathematics, not in the legal system. I'm sure there's an arbitrary line somewhere, and that that line has to do with "intent". (Getting 10 friends to invest, probably fine. Getting 10 people responding to a newspaper ad, probably not fine. Ah, the legal system...)
There's two reasons why this isn't fine, actually: You can't get strangers to invest unless they're accredited investors; but also the newspaper ad itself is illegal ("public offering of an unregistered security" or something along those lines).
It's OK for one person to invest in my startup.
It's still OK if I get one more person to invest in my startup. Induct on the number of people.
It's OK to get an infinite number of people to invest in my startup.
Q.E.D.
The reason induction doesn't work is because the law defines that a certain number of people is "public offering of an unregistered security". In math, there is no such restriction.
It varies by jurisdiction, but usually the rule is that "friends and family" are ok, but you can only take money from strangers if they're rich (i.e. "accredited investors"). In BC the "friends and families" rule is defined more or less as "people who have direct knowledge of you and are investing in you instead of the company".
But again, the rules vary by jurisdiction -- so consult a lawyer who is familiar with the rules in your jurisdiction before you do this.
1. Public solicitations is a no-no. What constitues "public" is quite well-defined.
2. Investors must be able to fend for themsleves - either be educted in the area, rich enough to hire someone who is or otherwise be able to assess risk.
http://en.wikipedia.org/wiki/Hudson_Bay_Company
At the same time, Joe Average might be able to pick up some "deals" on startups that VCs think will fail but he thinks will do fine.
The market is not a bad idea.
I am not an expert on this so independent checking on this would be nice. To my knowledge, NYSE and GS have setup something like this.
On average you'll need around 400K to buy a trading server (Meta Trader, ActForex, Manhattan Platform, etc), market the brokerage, and setup relationships with liquidity providers.
Not exactly a stock market, but its the closest to a tangible trading business for someone looking to get into that type of market.
Last year there was a very convincing video on Ted about Africa needing basic financial infrastructure like a futures market.
I've read other people about "Joe The Plumber" not having access to futures to protect large financial operations like purchasing real estate.
Also Nasdaq, NY, etc. are completely unaffordable for small ventures (perhaps why most people on dotcoms aim at multimillion sized IPOs.)
This has to change.
You would still need a crazy team of lawyers to avoid trouble, but it's certainly a loophole worth looking into and a very efficient system for allocating capital.