Crowdsourced stock market trading

Stock market trading has become a dirty word, or if not that, at least uninteresting. Wall Street excesses and the 2008 crash have led to little recent opportunity for financial return (non-existent interest rates for saving, and flat stock markets for equities (the S&P 500 return in 2011 was 0% (S&P 1257 at 12/31/10, 1258 at 12/31/11). Gold has been one of the only asset classes to realize real return (142% five-year return, $632 as of 12/28/06, $1531 as of 12/29/11). The particular subjective day trader gave way to faceless high-frequency computer algorithms as one of the only means of squeezing profits out of the stock market.

One thing that could turn this around, and have the dual benefit of bringing more transparency to markets and market practices is crowdsourcing. The enormous amounts of clean, freely available, computable, straightforward-to-understand data without privacy issues are ideal for crowdsourced manipulation.

Earlier attempts at applying crowdsourcing to stock market trading (for example, Yahoo Prediction Markets with leaderboard-style tracking of traders’ mock portfolios) fell by the wayside with the 2008 crash, but the concept could be reincarnated. There are several obvious ways to deploy crowdsourcing in stock market trading startups:

1. First would be a direct implementation of crowdsourcing as from the Wikinomics, fold.it, eteRNA model: making usable web-based datasets available to the wisdom-of-crowds to apply diverse ideas from different disciplines, often resulting in better results than those produced by the ‘experts’ in any field. Leaderboards, competition, leveling-up, forums, badges, and other gamefication techniques would be expected.
2. Second would be a platform where real-life traders can open source their trades, either before or after execution. Interested traders would grant open access to their trade logs, inviting crowd review to find winning trades, strategies, and traders, and conduct meta-analyses like what strategies work well in a high-volatility environment, a down economy, etc.
3. Third would be prediction markets 2.0, a more social gamefication implementation of prediction markets for stock trading, sales forecasting, movie hit projections, elections, and flu outbreaks through platforms like Iowa Electronic Markets, Intrade, etc.

Crowdsourcing the stock market

New market tools are emerging that could be much better (real-time and objective) indicators of performance than the traditional methods of speculation-driven stock market price, quarterly reporting, and financial statements.

These tech tools are a nice response to the perceived social economic malaise of the times, and could help to realize some of the new thinking promulgated by both theorists and activists that markets are more of a Darwinian game of the fittest rather than an invisible hand meeting favorably for all parties.

The new market tools - real-time performance indicators:

• Prediction markets (SimExchange, Hollywood Stock Exchange, Intrade) for unit sales data
  
• Real-time purchasing feeds (Blippy, Google Wallet, social shopping sites) for the aggregation of real-time purchase data
• Social media check-ins (FourSquare, Facebook, etc.) for revenue prediction
• Forum badging and site gamification (Badgeville) for measuring the digital economics of brand sentiment

Affinity Capital

A key concept in the 2.0 Economy is affinity capital. Deeper levels of information about every economic transaction are starting to be available such that individuals, businesses and communities can be very specific in directing and democratizing their capital. In many cases, products can be chosen that are organic, recyclable, fair trade, made from sustainable materials and made by companies with fair labor practices or whatever affinities or attributes the buyer cares about.

Affinity-directed capital can influence both cash inflows and outflows. Affinity inflows are the money earned. Earners can now be more selective by checking Corporate Social Responsibility reports if thinking of working for large companies, by being entrepreneurs and contractors, finding projects on website marketplaces like TopCoder (software programming), oDesk (professional services) and 99 designs (graphic design) or by having clients seek them directly through their web activities and content. A taxonomy of affinity capital marketplace links is available here.

Affinity capital influences capital outflows too: investing, donating and purchasing. In investing, socially-responsible investing (SRI) mutual funds have been available for several years, and now peer-to-peer lending and social venture capital platforms allow investors to direct capital into these asset classes too. Philanthropy is merging with investing in cases like Kiva where investors find a lower or blended financial return is acceptable when social outcomes can also be achieved. The SocialCapitalMarkets conference has continued to draw several hundred worldwide social entrepreneurs to talk about how to bring social change with economic transactions at their annual September conference in San Francisco. The organization also sponsors The Hub, twelve worldwide physical spaces for social capital markets collaboration.

Affinity purchasing, voting with dollars based on product attributes, is another way of democratizing capital as consumers and businesses check websites like ClimateCooler, the Fair Trade Federation and others to see how socially and environmentally friendly products are before buying or purchasing directly from green product websites like GreenHome or other affinity-based marketplaces.

Socially-responsible and environmentally-friendly are some of the biggest affinity attributes but the key point is that deep attribute knowledge means that capital can be directed granularly to ANY affinity attribute.

Automatic Markets

At Singularity University, one of the most pervasive memes was the “routing packets” metaphor; that many current activities are just like routing packets on the Internet. This includes areas such as people in driverless cars, electrons in electric vehicle charging and power entry, load-balancing, routing and delivery on smartgrid electricity networks.

Fungible resources and quantized packet-routing
The packet-routing concept could be extended to neurons (routed in humans or AIs), clean water, clean air, food, disease management, health care system access and navigation, and in the farther future, information (neurally-summoned) and emotional support (automatically-summoned per human dopamine levels from nearby people or robots). It is all routing…directing quantized fungible resources to where they are needed and requested.

Automatic Markets
Since these various resources are not uniformly demanded, the idea of markets as a resource allocation mechanism is immediately obvious.

Further that automated, or automatic markets with pre-specified user preferences, analogous to limit orders, could be optimum. Markets could meet in equilibrium and transact, buying, selling, and adjusting automatically per evolving conditions and pre-programmed user profiles, permissions, and bidding functions.

Truly smart grids would have automatic bidding functions (as a precursor to more intelligence-like utility functions) that would indicate preferences and bid and equalize resource allocation, the truly invisible digital hand.

The key parameters of a working market, liquidity, price discovery and ease of exchange would seem to be present in these cases with large numbers of participants and market monitoring and bidding via web or SMS interfaces. The next layer, secondary markets and futures and options could also evolve as an improvement to market efficiency, if designed with appropriate incentives.

Automatic markets are not without flaw, they exist now in traditional financial markets, causing occasional but volatile disruptions in the form of quantitative program-trading (blamed for exacerbating the 1987 Black Monday stock market crash) and flash-trading. Speculative aspects are not trivial and would be a critical area for market designers to watch, particularly managing for high liquidity and equal access (e.g.; faster Internet connections do not matter).

Markets to grow as a digitized resource allocation tool
At present, markets are not pervasive in life. The most notable examples are traditional financial markets, eBay, peer-to-peer finance websites and prediction markets. Being in a global digital era with the ability to use resources in a more fungible and transferable way could further promulgate the use of markets as a resource allocation tool.

A focus on preference rather than monetary value, and other currencies such as attention, authority, trust, etc. could vastly extend the range of implementation of market principles.