During the summer of 2008, I was having one of those NY business breakfasts – the kind of meal you can’t get anywhere else on the planet. It was like a $38 meal of poached eggs and French Press. I was meeting an old friend, a very smart hedge fund alum. I had this notion about capturing terabytes of media transaction data, and I wanted his opinion. The thinking went, media markets are utterly irrational, sellers don’t know up from down, velocity is picking up, fragmentation is in full blossom. And all the while, everyone is standing around shrugging their shoulders as to why the ‘big money’ was not moving off the sidelines and headlong into this new electronically traded media market. But I had it all figured out. It was clear as day to me: there was no market signal, no data. Every transaction formed its own market. And that was going to limit severely the development of market liquidity and keep dollars from flowing to these marketplaces.
My guy was a veteran of a couple of the most profitable and aggressive derivative desks in the world. He traded at the top, traded everything, every instrument, every market, every city. This guy would structure a trade around whether your car started in the morning, and make money regardless of outcome. Until one day my guy recognized that there was no Tums big enough that it could keep him in the game – basically he was gonna explode. So he retired at 34. This guy is a monster, a trading animal in a very expensive suit and tie, and very little gets past him.
For the first part of the breakfast I had been talking about a positive vision of information markets, about data singularity, about data liquidity and financial instrumentation… And then I walk right into my friend’s buzzsaw. At this point I should say that I talk a lot. As a matter of fact, when the topic is something I know something about, I pretty much can’t shut up. So here I am going on and on about how the ads markets, the media markets, were ripe for standardization and normalization via the introduction of information products and market data services. Hadn’t that been the story of the financial markets? Isn’t that how market velocity and liquidity had emerged? Through standardized trade capture, screen based trading, market data services? Wasn’t it true that once these information services and screen-based trading products were at long last introduced to the market in the 1970s and 80s, there had been an explosion in transaction liquidity? Wasn’t this precisely because there was at last price discovery, a facility in risk management, you had derivatives, you had computers driving trading? There was a massive surge in the dollar volume traded… It was all so good. So capitalist. So electronic.
So here we were, my $58 poached eggs congealing as I talk and talk… I am coming to my point. I swear. I had this notion I wanted to bounce off him – somehow this idea for a market data service and data liquidity and risk management could be extended and expanded beyond the more traditional markets of financial instrumentation. Wasn’t it at last time to take this same approach beyond financial markets? Was he maybe interested in talking more about this with me? It was August 2008 and the S&P was breaking down a bit, sure, but we were still golden – Bear Stearns was a penny stock subsidiary of JP Morgan, but all in all that was a small price to pay. Wasn’t it time to talk about risk management for other markets, hedge-ability for all kinds of electronically traded asset classes? Sure there were cracks showing in the financial markets, but there was always definitely capital for this kind of thing, wasn’t there? There was always going to be an appetite for businesses dealing in petabytes of PRIMARY ECONOMIC SIGNAL, MAN....
I think at this point in the meal I was probably standing up, launching into an impromptu whiteboard session. I was passionate about this idea at the time. There could be data and information flowing from one terminal to the other. There could be indexing, real-time valuation, market dashboarding. “Bro, we are gonna have a single electronic media market – there will be a central clearing registry, there will be market data services, there will be traders and brokers arrayed on both sides of that marketplace. We are coming nearer to that day when the buyer and seller can direct connect by virtue of clearing and information services. We are going to wipe away these false distinctions between a spot market or an upfront market – data is going to liberate the sellers. They are going to that promised land: optionality. They are going to have the data and routing sophistication they need to maintain optionality. And it’s going to juice their margins. They are going to be like a prop desk that is sitting on a big position and that knows where all the buyers are and what they are willing to pay. And it’s all going to be fueled by my information products.”
When he got up to go to the men’s room, I swear he was smirking. I ate my cold $148 eggs. When my friend returned to the table, he dropped the bomb. “It’ll never work.” He meant it too.
“Nobody can afford to capture this data. Even if you somehow convince these guys to let you sit on their stream, even if it is actually signal, the price point it’s reflecting is infinitely small. Nobody can build the infrastructure they need to capture, process and store this stuff, not data that fine-grained. No way. You’ll need millions of dollars per month just to store and process the stuff. Your db license is going to cripple you. Guys on the Street can do this cause they are trading hundreds of millions of dollars at a clip. You can’t do this when it’s thousands of dollars per trade. It won’t work. It’s interesting but it won’t work.” Then, the kick in the teeth. “One other thing. I’m a trader, and I’m your friend. So you should listen to me. Dude. Would you please quit it with the financial markets jargon already? Financial markets work because of the capital that trades through them, and because of the capital that is spent to operate and maintain them. Your market will never be able to afford this infrastructure.”
The past couple of years have brought into focus that we are experiencing an “Attack of the Exponentials”: accelerating collapse in storage cost; accelerating collapse in CPU cost; collapse in data transfer cost; surge in network nodes. I think all that financial markets jargon is finally becoming relevant. Especially when storage has collapsed to $70 per month per TB, down from $1250 in just under 30 months.
"Take that. Dude."