Finance and high tech – two market paradigms that don't mix

By | December 21, 2011
(Warning: long rant!)

I'm no stranger to the wide array of complex financial instruments out there – and I dare say I understand them better than most people, in particular tech journalists. Just yesterday, I was ranting to my husband about the absurdity of the speculations and analysis made in mainstream tech blogs over the initial day trading prices of zynga. I mean, I don't mind that bloggers make speculations on what the trading price means with respect to the company's value. But any intraday trader should know that new emissions are likely to fall in a slumped and volatile market, before rising again. So put a reasonable tolerance range around the price fluctuation and if Zynga's price leaves that zone, then go ahead and hype your theory about why.

Then I found this reaction to allthis. I think the analogy to options is very fitting, but also highlights how far the two worlds are from one another. See, financial institutes are very creative in how they market their gambling products. Playing stocks is (contrary to popular opinion) not gambling – that money has the potential to assist some corporate goal, since you are essentially investing in a company. Funds and bonds are similar. But futures, options, and further derivatives are: you are buying a bet that a particular outcome will be reached. And this is gambling, since only you and the market maker actually see the money – the company or industry behind that basis value never sees a cent of it.

And then it gets more interesting: obviously, the big money lies in trading complex instruments wisely. So the financial institutes created bets on bets, packaged them up as high-return, safer-than-single-bet-bundles, and started selling these as well. Packaging up other student debt and selling that as a product is game as well, even if the students never agreed to their student loan being traded and monetized as a betting product. And then the utter non-transparancy behind everything: you as the investor never get to see the true terms and conditions or the true investment behind whatever you bought unless you go on a time-consuming inquiry quest, not even when you sign a retirement plan 'contract'. Which almost no-one has time for, and of those who do, few have enough knowledge to know what to ask and then sift through all the dodgy answers.

So whats wrong with introducing these shady practices into the non-financial world? To tell the truth, I'm glad that consumers are crying out. It's bad enough in finance, and people should be able to understand the rules of the game they play. I also think that consumer agencies (Verbraucherzentrale) should crack down on the finance industry – I for one think it is outrageous that this is one of the few industries where you are able to close a binding contract running for indefinite time without having received the full details on what terms and conditions, fees, etc there are to deal with. (Yes, they aren't there even in the 100 page prospect that comes with the contract signing page – I've checked many times).

But to get back to the point: online commerce has built itself around being easy to use. And until now, easy to use has meant easy to understand. The financial market has grown up around the need for banks to raise more capital than they have, which resulted in the invention of new (and sleazy) financial products. Monetization is an important and real challenge for online businesses, and I think we're seeing just the beginning of an evolutionary process to determine just how much sleaziness users are willing to buy. I just hope it will never get as sleazy as the financial industry is today.

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