I am pleased to announce that I have established data disclosure agreements with Arbitrage Wise of SL Capital Exchange (also covering data from their previous incarnation as AVIX) and Cocky Dagger of International Stock Exchange. (I have discussed the possibility with LukeConnell Vandeverre of World Stock Exchange, but we have yet to come to an agreement. I will announce that agreement should it be forthcoming)
According to the agreement, the exchanges will provide me with comprehensive data on trades, dividends and stock issuances for all listed firms. I will analyze the data, and publish summary results that will allow people to assess aspects of stock behavior that are a staple of real-world analyses, such as:
•How are stock returns associated with economic events in Second Life, including dividend and other company announcements, Linden Lab policies, and currency supply? Many observers have made assertions about how these policies affect the value of Second Life businesses, and this data should allow us to document the validity of these claims.
•What factors determine market liquidity and the cost of capital? Financial theory predicts that firms that provide more transparency should be more liquid, and should also have higher prices. This data should allow listing firms to identify disclosure policies that maximize the value of their businesses.
•How efficient are the markets? According to “Efficient Markets Theory,” stock prices should react so quickly and completely to public information (like Linden Lab announcements), that you can’t predict future returns from past events. However, real life analyses have shown many exceptions to these rules. (For example, firms that do quite well one month tend to do well the next month, and firms that report surprisingly strong earnings one quarter tend to do well over the next two quarters.)
Naturally, investor confidentiality is of the utmost concern to those running the exchanges. Under the terms of the agreement, I will not disclose any information that would compromise the privacy of any investors. (For example, I will not know the identity of individual traders.) Moreover, the published analyses will focus on the stock markets, not the associated banking divisions. Thus, this agreement will not result in public analyses of how the exchanges are investing cash maintained in banking/brokerage accounts.
Getting this data into proper form for analysis will take some time, as will analysis, but I hope to have initial results published in a public forum sometime during early Fall.
I believe that the exchanges’ agreement to allow independent analysis of exchange data sends a strong signal that the exchanges understand the importance of transparency in maintaining investor confidence. I also expect that the publication of data analysis will further increase investor confidence, and attract new investors and new listing companies to the exchanges.
Finally, let me assure SL residents of my intention to be as objective as possible in my analysis. One important element of objectivity is to avoid financial ties that might provide an incentive to shade the analysis, or (almost as bad) that might lead people to think I have done so. To mitigate this concern, I am announcing that do not intend to invest in any of the exchanges, nor will I invest in any for-profit businesses in Second Life, whether or not they are listed on the exchanges.
For the record, I am not currently associated with any existing non-profit organizations in Second Life (like the SLEC, SLBB, SLBA, Metaversed Republic, etc.). Naturally, though, I keep informed by frequently attending meetings of for-profit and not-for-profit organizations in SL, and join the groups these organizations have created.
Should my financial or official ties with organizations in Second Life change, I will announce that promptly on this website.
Congrats on working this out with them. Getting this data is a fantastic first step toward greater accountability. And it's also just going to be interesting to see under the hood a little bit. I can't wait to see what you come up with.
I think it's important that information be disclosed to the public -- the investors -- and not just to experts. The sooner you make this information public, the more credible you and they will be.
There's no "transparency" when merely an expert has received a dossier that will take time to "analyze". Just a special relationship.
I agree...actual transparency arises when the analyses are public, and the original data are widely available. I plan to work quickly on both of these fronts. I also recognize that my credibility in Second Life is determined by the outcomes of my efforts, more than my credentials as an academic who studies financial markets for a living, and who promises to be independent (though credentials and promises of independence don't hurt).
I view it as a very encouraging sign that the people running these exchanges have agreed to an arrangement that, at least on the face of it, has a good chance of dramatically improving market transparency. But I recommend that readers suspend judgment on what this implies for the credibility of the markets, gradually increasing their confidence as this process unfolds, from my announcement that I already have the data in hand (which hasn't happened yet), to publication of some summary analyses, to publication of a relatively raw data set (cleaned only to protect the trader anonymity and any propriety information appropriately kept confidential by exchanges which are, after all, competing enterprises).
I also think it is reasonable for people to suspend judgment on my own credibility, until others have seen--and replicated--my analyses.