Market Watch Mindset

An Exchange Boom?

These last weeks have been busy with events, announcements and new startups! Great material for future posts but this one is on markets and how new exchanges have become an interesting field in financial services innovation. Recently Exchanges have had a poor reputation. The flash crash has highlighted the multiplicity as well as complexity of stock markets. But since its creation in the 13th century, there is no better system that allows liquid, transparent, risk free (default on transaction) exchange of virtual goods. It’s therefore not surprising to see that innovative start-ups in financial services are trying to create exchanges to address the transaction needs of new goods.

Sharespost is addressing a niche problem. How to trade private companies shares? The growing number of high value private companies Facebook, Tesla, etc…) which uses share as part of their employees benefits and the limitation for IPOs in the current market have spurred interest in trading those shares. However, contrary to the public market, there is no exchange for these trades, until now. Sharespost aims at easing these transactions by facilitating contacts between buyers and sellers (incl documentation), providing key analysts information to support pricing and supporting settlements with US Bank. By not taking commissions on trades, but by making buyers and sellers subscribe for a monthly fee, Sharespost is acting as a “passive bulletin board” and does not have to register with the SEC. For more details you can read this interesting blog post.

In addition, we can highlight another key player in this field:

The Receivables Exchange: Founded in 2007 in New Orleans as the first online marketplace for trading account receivables, The Receivables Exchange has benefited from the credit freeze of the crisis to gain market share by allowing companies to obtain more easily financing and providing an alternative investment category to institutional investors. The Receivables Exchange allow companies to post invoices and debtors details and create auctions for them specifying the price details. Investors bid on the receivables and the winner buy it (payment next day). When the Seller is paid, the Receivable Exchange remits the amount and any accrued fees to the Buyer.

Playersauctions: Virtual goods, especially for gaming is a fast pace growing market: it should reach in the US $1.6 billion in 2010 with $835 million from social gaming. PlayersAuctions, lauched in 1999 and re-launched in 2008 (owned then by the Korean Itemmania) allows players to buy and sell digital goods from social games between them, even if many publishers are forbidding the practice in their End User Agreement. Playersauction is serving as an intermediary, listing the items and keeping the payments in escrow until both parties have confirmed the delivery. It reimburses buyers or sellers if the settlement is not concluded as set. A feedback and reputation system (a la Ebay) allows users to evaluate risks.

Livegamer is a company specialized in virtual currencies, virtual economies and micro-transactions. Part of their market offer is a white label Player 2 Player trading platform that can be implemented by social games or networks. Its Life Gamer Exchange platform provides a sanctioned player 2 player trading platform, accessible from the web, to games such as EverQuest 2. As these exchange are supported by the publishers, the goods are automatically transferred from one account to the other.

As seen from the examples above, exchange are an attractive business model for start-ups, especially since technical development have made it “easier” to develop such platforms. However it is relatively surprising how Ebay, one of the biggest auction platform on the web, hasn’t expended in this market yet. EBay is a model for some of the start-ups listed above: The Receivables Exchange has been described many times as the Ebay of receivables and Playersauctions has been quoted as being “a direct response to the banning of account sales and other digital wares on popular auction sites like eBay”. Ebay’s decision to move away from virtual goods at the time was perhaps strategic due to legal liabilities but with the growth of the virtual goods and the increasing maturity of virtual economies I believe it is an interesting market for them to re-enter.

What do you think? Any other interesting exchange startups?

Photo: Andreas Gursky - Chicago Trade Board II

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