

Wacky, But Serious: What would it take to set up a stock market? - run4yourlives

“If at first, the idea is not absurd, then there is no hope for it” ~ Einstein<p>So, I was reading Matt's post about VC, which saw me following this link:<p>http://weblog.raganwald.com/2005/03/are-you-thinking-of-working-for-start.html<p>Raganwald States:<p>"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!"<p>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.<p>So, I googled "what would it take to set up an online stock market" (I know, worst query ever) and I found this:<p>http://www.globalchange.com/stock.htm<p>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?<p>I'm fully aware that this idea is out to lunch, but I'm interested on hearing other people's opinions.
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jmcmichael
I was part of a project about a few years ago to do such a thing. The
algorithms for writing a stock exchange are quite well known. I was just
working on the interface, so I don't have a complete understanding of what was
going on under the hood, but it was my understanding that we were using the
same algorithm as the London Stock Exchange, which was developed using public
funds and hence was made available to the public.

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.

~~~
aston
Mind linking to some of the underlying stock exchange algorithms?

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joshu
It's not really an algorithm. It's called a limit order book. At least that's
the way many electronic markets work.

~~~
nostrademons
Yeah, it's pretty trivial. Here's a quick implementation description in CS
terms:

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.)

~~~
joshu
I guess it's more of a "data structure" than an algorithm. Anyway, you need
more than a heap, because price, time, size all matter. That's pretty close,
though.

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.

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rms
You fall under their regulation if you're in the US.
[http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Co...](http://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission)

Good luck.

~~~
jraines
Are things like Intrade regulated?

~~~
mattmaroon
Intrade doesn't sell stock. It sells betting contracts. It's an entirely
different type of regulation, and is actually illegal here.

~~~
ckinnan
Intrade offers futures contracts on various events. It's not betting per se
and they can be used as part of a legitimate investment portfolio.

It's still illegal here though, the US government will find a way to shut down
any kind of innovative online market.

~~~
mattmaroon
It's not equity, and unlike futures, there's no underlying asset so it's not
analogous to stocks, options, futures, or anything the SEC regulates. It's
just a different type of gambling.

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qhoxie
This is not all that crazy.

To 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.

~~~
mattmaroon
You really don't want to mess around with this without consulting a lawyer
first. A misstep could mean committing multiple felonies and possible jail
time.

Seriously, talk to a lawyer.

~~~
qhoxie
Right, hence my saying that it will be ficticious in its initial incarnation.

~~~
mattmaroon
As long as you're not taking in real money or paying out real prizes, you're
OK. It is actually illegal in some states to pay out real prizes even if the
entry is free due to sweepstakes laws, and there you get into the 'consult
your laywer' area. But even then, the odds of anyone ever prosecuting you for
giving stuff away are virtually non-existent.

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callmeed
I don't think it's a crazy idea but, as rms pointed out, if you publicly
announce part of your company for sale, you fall under SEC regulations.

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.

~~~
lisper
Nope, you can do this. Brian Singerman and I did it. But it's a boatload of
work. We did it once, and I'm pretty sure we won't do it again, at least not
any time soon.

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herdrick
I tried to do something like this once. If you were to try in the USA, here's
what I might tell you:

The regulatory burden is immense. This is a project for lawyers. However,
keeping ordinary investors away from your exchange would help a lot. Open it
to accredited investors only. This would make the regulatory environment much
simpler.

You would be competing against established competitors, like the Toronto
Venture Exchange, on which are traded companies with a market cap of a few
million dollars. An IPO for a company to be traded on the TVE is a lot like a
series A in the USA.

Keep in mind that you are talking about three functions: 1) turning the stock
of a company into something that can be bought and sold by the public 2)
distributing that stock to its initial buyers 3) giving that stock a place to
be bought and sold

The first two are done by investment banks, who normally do the work of
preparing the stock of the company to be traded on NASDAQ as well. Only the
last function is what an exchange does. #2 is what W.R. Hambrect has been
trying to improve with his OpenIPO (see link below).

Generally in small market cap companies the job of a "market maker" is thought
to be essential. I don't buy this. I think an exchange without much liquidity
is better than nothing.

Start reading here:

<http://en.wikipedia.org/wiki/OpenIPO>

[http://en.wikipedia.org/wiki/Electronic_Communication_Networ...](http://en.wikipedia.org/wiki/Electronic_Communication_Network)

<http://en.wikipedia.org/wiki/Arizona_Stock_Exchange>

<http://en.wikipedia.org/wiki/Over-the-counter_>(finance)

I'm not a lawyer and this is not legal advice. Get a lawyer.

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JesseAldridge
Well, if I accept money from my uncle with the understanding that I'll pay him
back ten fold if I make it big, that's legal right? And let's say I get five
friends and make the same deal with them; again, nothing illegal there right?

Where exactly is the line drawn here...

~~~
jrockway
_Well, if I accept money from my uncle with the understanding that I'll pay
him back ten fold if I make it big, that's legal right? And let's say I get
five friends and make the same deal with them; again, nothing illegal there
right?_

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...)

~~~
cperciva
_Getting 10 people responding to a newspaper ad, probably not fine._

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).

~~~
jrockway
My post is about induction. Let me explain in detail:

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.

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gcv
As everyone's pointing out, any exchange for trading securities falls under
massive amounts of regulation. It's possible to navigate the legal morass, but
will require a group of lawyers with vast experience in securities law and
regulations, preferably at the international level as well.

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.

~~~
gaius
It happens all the time. Usually a consortium of banks who trade a lot with
each other decide it's going to be easier to set up a separate organization to
handle all their interactions. I worked on one a few years ago, Centradia,
which was a private exchange that 5 banks used to pool liquidity for foreign
exchange dealing. Thera are quite a few, and no-one outside the industry will
ever have heard of them. A mate of mine's at Equiduct now.

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nickmolnar
I think a good place to start looking for a model is donorschoose.org. Don't
invest in companies: invest in projects. If you broke the company up into
small, discrete, chunks you could probably get under the investor limits and
not have to file a disclosure. You would basically be letting the market
allocate funds within a firm.Then, the firm just breaks up profits and gives
dividends. Of course, the term "firm" doesn't really fit here, things would be
much looser than what fits into our present definition.

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.

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jbrun
There are venture markets for smaller companies. Such as those in Vancouver,
Canada. But the stocks are so volatile it scares off most investors.

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auston
I once saw this, it could be what you are talking about, kind of:
<http://couchtycoon.net/>

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huherto
"What I need is a market that allows me to invest little bits of money into
new ventures."...I would also like it.

So here is my shot at it.

1.- Set up a fund where you can buy shares.

2.- Invite start-ups to apply for our fund.

3.- The shareholders of the fund get to vote.

4.- The fund invests money in the chosen start-ups.

5.- The share holders (as individuals) try to help the start-ups (testing,
word-of-mouth, ideas, etc.) It will be more like VC 2.0 ;-)

Edit: formatting.

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KB
The FOREX (Foreign Exchange) market is pretty much the wild west of trading at
the moment. No central exchange, little to no regulation, etc...

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.

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lacker
Your main problem will be liquidity - you'll have to find people who care
enough to throw in some money.

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.

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ryanmahoski
Another approach might be to create a service that helps startups open their
books to become financially transparent. With Amazon FPS, not only could you
expose sales data in real time but you could split the revenues among
individual stakeholders. So the idea is, raise capital by encouraging your
visitors to purchase a share of your future sales - and make the algorithm so
transparent that they're assured X even if Y happens.

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steveplace
You might have to be an accredited investor in order to do these sort of
investments.

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.

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anamax
What's the point of owning your own stock market?

Folks won't buy on your market if prices are lower elsewhere. Folks won't sell
on your market if prices are higher elsewhere. Yes, there will be momentary
discrepancies, but DE Shaw will drive them to 0.

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bokonist
I think it's a great idea ( I've had the same one :-)) The problem, of course,
is the legality of it, though perhaps there could be ways around it ( an
offshore market? structure it as a mutual fund? ). You'd need a great lawyer
...

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mixmax
Ideas that are initially wacky often seem brilliant in retrospect. I like it a
lot.

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jmtame
Putting the investment into the hands of hackers who understand the technology
better than anyone else...

Makes me wonder if we would even need VCs at that point anymore.

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rcwhite
Also remember that "normal" stock markets are secondary markets, buying a
stock doesn't actually provide capital to the startup (unless it's the IPO).

~~~
jrockway
Good point, but it could still be helpful. If you are a VC, it is probably
nice to know you can inject some cash into a company and if the company starts
going downhill, you can easily sell your shares to someone else.

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.

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alecco
Think microfinance. I'd love to join that revolution.

~~~
brianobush
Microfinance tends to be concerned with micro-loans, which would be more akin
to bonds. The topic here is equity, which is partial ownership of companies
and other enterprises.

~~~
alecco
"tends to be concerned with micro-loans"

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.

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psyklic
The US also has strict rules against gambling, and stock markets are very
borderline -- so watch out!

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maxklein
Never quote Einstein. It generally has the opposite effect of what you intend.

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.

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mtw
see <http://vencorps.com>

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ArcticCelt
Not including the oldest commercial corporation in North America, The Hudson
Bay Company is a bit weak.

<http://en.wikipedia.org/wiki/Hudson_Bay_Company>

~~~
run4yourlives
wrong thread dude.

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jrsims
So, like, a free market of free markets?

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zandorg
It'd probably be an auction, too. You could easily use Ebay, except for
regulation.

~~~
nickmolnar
Bid/Ask is a much more efficient system than an auction. Stock markets were
all English auctions until people realized there was a better way.

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newt0311
You might want to look at private trading markets. It is sort of a lower scale
version of the public markets. Companies can be traded between entities as
stock without the onerous accounting requirements but there are certain
stringent requirements. There can be at most 400 share-holders and the deal
killer -- stock holders have to be institutional investors with over $100
million in assets. If you have that much cash, you may as well become a VC.

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.

