Several months ago I watched a TED talk by Wingham Rowan. The talk was about a “new” kind of job markets where employers were able to advertise job opportunities right down to the specific time they required, such that employees were able to fill the timeslots flexibly without committing more than necessary. He gave an example where a coffee shop owner can advertise four hour job vacancy for Wednesday next week, and then to get the position filled in time before the day arrived. Because the job advertised was very specific for its requirement (i.e. waitering), time (four hours on Wednesday) and pay ($25/hour), Wingham argued that people who could only work casually would be able to contribute, for example parents with small kids who will not be able to fill full time position. In turns, this supply of workers would be good for the workforce where the baby boomers have been retiring at a very fast pace. Wingham argued that sophisticated mechanism of market could be used to allow this job matching process to happen. Thus he insisted that market mechanism such as displayed at stock exchanges, should not be left only to the financial industry alone, but could be, and should be utilised for the benefit of the general public.
Although the idea is awesome, the practicality of securitising job markets is not that high in my opinion. However, I like his idea of utilising market mechanism to the benefit of the general public. In fact, I am not very sure why it has not been done, for the reasons I will elaborate on further.
The process of securitisation
Amazingly enough, it is hard to find definition of securitisation that is not related to financial assets. So here is one from a presentation from NYU mixed with my own wordings:
“Securitization is the transformation of an illiquid [material] into a security.”
So what is a security? By the same presentation, it is defined as below.
“A security is [a] tradable [product], and therefore more liquid than the underlying [materials]. Securitization of [material] can lower risk, add liquidity, and improve economic efficiency.”
The keywords here are the process of transformation of a non-tradable material into tradable products. Securitisation does not have to involve only financial assets. If, for example, my mum makes too much noodle for dinner, I can, by the process of boxing the noodles into takeaway containers, sell the noodles to my colleagues at work the next day. A big bowl of noodle that is sitting in my kitchen may not be easy for someone to eat, but once I package it nicely (yummy sauce included) to suit my colleagues’ lunch size appetites, it will be very easy for someone to buy it from me. I have successfully securitised my mum’s leftover noodle dinner in this example. I also wish my mum still cooks me dinner :(.
Some materials lend themselves very well to the securitisation process. In fact, most consumer goods are already in some sense, securitised. A normal size shampoo we typically find in the supermarket is about 500 ml, it is unlikely you will find a 2 liter bottle of shampoo. Similarly with a packet of peanuts, it does not get much bigger than 500 gr packets.
There is another key definition that was assumed in a securitised product, hence it was not even mentioned in the above definition. Securitised products have to have passed a certain quality check to be of the same standard. A government bond of 3% yield will give you half the income of two government bonds of 3% yields, as long as they are sold as the same “security”. It doesn’t matter whether you bought the bond through the government, or whether your spouse bought it through his friends. It will give the same amount of interest as they mature.
Large exchanges such as CME Group have some products that at first sight, may not fit into this homogenous quality standard. CME Group sells livestock, which are animals such as cows and pigs. This is the product description on what you can expect when buying the securitised hogs (pigs) from them:
“Stages of hog Production
The life cycle begins with the baby piglet. Each gilt (young female that has not given birth) and sow (mature female that has given birth) is generally bred twice a year, on a schedule to provide a continuous flow of pigs for the operation. To obtain the breeding stock, operators retain gilts that show superior growth, leanness, and reproductive potential as seen in their mothers. Boars (sexually mature males) used for breeding are generally purchased from breeding farms and have a working life of approximately two years.
Typically, it takes 6 months to raise a pig from birth to slaughter. Hogs are generally ready for market when they reach a weight of approximately 250 pounds. In 2009, the average federally inspected slaughter weight was 270 pounds with a carcass weight of 200 pounds. The weight at which hogs are marketed is affected by feed and hog prices. High feed prices and low hog prices may cause producers to sell hogs at a lighter weight while low feed prices and high hog prices might induce producers to feed hogs to a heavier weight before they are sold.”
The document then continues to explain other things such as the inventory of hogs:
One of the first pieces of information needed to study the hog pipeline is the size of the hog inventory. Hog inventory data can be obtained from the Hogs and Pigs report published by USDA’s National Agricultural Statistics Service (NASS). On a quarterly basis, this report provides information for all fifty U.S. states on the pig crop and total inventory as well as other relevant information regarding hogs and pigs. It also publishes a report on the litter size, breeding herd size, and the number of sows and gilts bred on a monthly basis.”
On this document, CME does not state that the pigs you get from them are clones of each other, but yet the exchange has gone a long way to ensure that at least each batch of securitised pigs are of the same homogenous standard: pigs that are of the same age, and size. The Hog Pipeline provides the crucial information of supply. If there are diseases infecting pigs, both buyers and sellers will be able to take that into account and react accordingly (prices will go up naturally, assuming no change in demand). Another thing to notice is that because the hogs are of the same quality, it does not matter which seller transacts with the buyer.
Let’s securitise mobile phones
It occurred to me that there are a lot of products around us that can be securitised, but sophisticated exchanges for them are not available yet. Consumer products such as mobile phones are very suitable to be securitised and to be offered as a “security” in an exchange ala CME style. The mobiles are already available in batches and of the same quality standard. A new iPhone you buy in JB Hi-fi is the same as an iPhone you can buy at Big W. Yes, there can be defects in the manufacturing process, but as the hogs example shown above, this should not stop mobile phones from being securitised. I also think it is far easier to make uniform mobile phones than raising pigs to the same weight range.
The main function of a market, is to assist the process of price discovery. Price discovery is a process to determine how much an item should be traded for. To do this, intention of both buyers and sellers are recorded in the form of orders. “Limit” orders allow people to specify the price to buy/sell, where as “market” orders are used as a shortcut to transact, similar to how people can click on the buy-it-now button on ebay if they do not want to participate in the auction. Whenever the price given by the buyer matches that of the seller, a trade happens, and it is recorded so that other buyers and sellers can use it as a baseline for future transactions.
Wait a minute, you might say, we have ebay, why do we need exchanges for new mobile phones? Ebay records the seller’s intention to transact at any point in time, but the same cannot be said for the buyer’s intention. If I want to buy a mobile phone, I have to do it when someone else is selling it by bidding in that’s seller’s auction, the more buyers, the more I lose out because the price is more likely to be higher. It would be nice if I can declare that I want a Samsung Galaxy S4 for $500 and then several sellers can outbid each other to give me the cheapest price for the mobile (rather than the other way around).
Recording the buyer’s intention is needed to make the market transparent. The current retail market is dominated by the large electronic stores that spend millions in advertising alone to reach the mass consumers. If I can broadcast how much I want to pay for the phone, maybe a much smaller retail shop will be able to match my price instead because they do not have to spend the money in advertising. Without knowing who the buyers are, the smaller retail shops cannot compete because their prices cannot be easily discovered by the masses.
Another characteristic of a sophisticated market is having anonymous sellers. In contrast to this, the seller reputations matter a lot in ebay. This is because ebay does not arrange settlement to guarantee that the transaction will be executed without fraud. Ebay does some of this, but only for big items such as automobiles, through its escrow services. In an exchange such as CME, this settlement service is usually assumed because all trades that have happened in an exchange has to be honoured. This is done in several ways, either by having escrow services, or having some margin account where the exchange can draw cash from the sellers in if the goods cannot be delivered to the buyer. Anonymous sellers (and buyers for that regard) are needed as without them, the product are not truly a “security”, as the reputation is not standardised. An escrow service may look like an overkill if you are just trying to buy an item for $5, but it is not necessarily so. It can be solved by having a margin paypal account of $10 for example.
Also, a market is usually region base. Australia has ASX, Singapore has SGX, UK has LSE, and so on. We can apply the same regional structure to this mobile phone exchange. Same region transactions allow more uniform shipping cost, and hence will be very beneficial for the buyers.
Of course this means that more people need to know how market operates, which I think is a good knowledge to know anyhow. I think the fact that the finance world is now so distant to the rest of the society is partly because the mechanism of how markets work is not as widely known as it should have been.
Right now the solution can already include one side of the coin. The sellers are already declaring their intention to sell on their websites, so those prices can be garnered and aggregated. It is then about recording the price that buyers want to transact on. Once that can be recorded reliably, smaller sellers will have easier time to reach the buyers and will have better chances at undercutting the larger stores. We, as the consumers, will be happier because we get better deals.
So why not? Why hasn’t someone come up with this*? Am I missing something obvious?
- I have googled hard… The closest one I’ve found is camel camel camel. It shows some pricing graph, and treat each amazon item as a security. You can track and get yourself emailed on when the price gets to a certain point, but it stops there.