I have no idea where the quote came from but it was something along the lines of “America claims they believe in a free market … they should try it some time.”
The argument behind the quip was that what is generally assumed to be a free market in the U.S. isn’t. The reason for this is that in a truly free market, everyone has the same information and plays on a “level playing field.”
Alas, this isn’t the case in U.S. market where what is called “information asymmetry” is the norm. If you should doubt this idea – that some people leverage their insider knowledge to their advantage just consider how Goldman Sachs was able to profit from the 2008 subprime mortgage crisis.
Wikipedia explains the crisis as follows:
“During the 2007 subprime mortgage crisis, Goldman was able to profit from the collapse in subprime mortgage bonds in the summer of 2007 by short-selling subprime mortgage-backed securities … Goldman’s structured products group in New York, made a profit of $4 billion by ‘betting’ on a collapse in the sub-prime market, and shorting mortgage-related securities. By summer of 2007, they persuaded colleagues to see their point of view and talked around skeptical risk management executives. The firm initially avoided large subprime writedowns, and achieved a net profit due to significant losses on non-prime securitized loans being offset by gains on short mortgage positions.”
For an amazingly clear explanation of how Goldman Sachs capitalized on information asymmetry see “Money and Power: How Goldman Sachs Came to Rule the World” by William D. Cohan (if you are not angry by the end of the second chapter, you aren’t paying attention).
So, how to cure the market’s information asymmetry problem? The only answer appears to be “transparency” – the requirement for all players in a market to reveal how they operate and make decisions. Obviously there’s a limit to this: We can’t, and shouldn’t, do away with competitive advantage but that’s a different issue from the kind of unfair leverage that Goldman Sachs had through its market manipulation.
So, the more we all know about how corporations work, the more level the playing field can be. And one of the areas where we need far more data than has traditionally been available is corporate information in the form of the various filings that corporate entities are required to do.
Sure, you can go and research corporate filings but given how fast markets now move and the constraints imposed by humans having to read and translate paper filings into databases and spreadsheets, there’s an obvious need for computerization to optimize and streamline the filing and retrieval process.
Enter XRBL, described by the XRBL consortium as, “a technology language for the electronic communication of business and financial data and is being implemented worldwide. XBRL-formatted documents enable greater efficiency, improved accuracy and reliability as well as cost savings to those involved in supplying and using financial and business information data.”
What’s so impressive is that the consortium has just launched the XRBL Challenge. The consortium explains: “Over 1770 companies have already filed XRBL-formatted financial statements to the SEC and by year-end 2011, all public companies will be doing so. While several XRBL-enabled tools are available on the marketplace today, we’ve created the XRBL Challenge to encourage the development of more tools and build awareness among analysts about the wealth of data available to them. The XRBL Challenge is a contest that invites participants to contribute open source analytical applications for investors that leverage corporate XBRL data.”
Judged by a VIP panel consisting of Google Finance, GIV Venture Partners, Pipeline Trading LLP, Viano Capital and Wharton Research Data Services, the grand prize for this challenge is $20,000.
The results of this challenge could be amazing and the potential for moving us towards something that looks more like a free market and less like a monstrous insider trading scheme is the real prize.
