The World of Online Gaming

It’s the purpose of this blog to be informative about next generation technologies and the way they are shaping the world of finance. However, I would like to take a break, step back, and look at something changing the world of business. And far from what some people might incorrectly call the “stiff” world of finance, the arena that I would like to talk to you about is a bit more fun. But just a little. Let’s not get carried away. But hopefully after reading this entry you become aware of some new business opportunities.

Online Video Games
Let me start of by asking you a question. If you were an executive, would you like to find a tool that supports collaborative tasks, accommodates large or small teams, operates in real-time, provides rich content, is immersive and compelling, and last but not least makes collaboration both fun and productive? Like such a tool exists. Well, it does. And it might not be exactly along the same lines with what you’re thinking. It’s not from SAP, Oracle, or IBM. The developers of these wonderful tools are- get ready for this- Sony, Microsoft, Blizard, Mindmark, and the list goes on. That’s right I’m talking about video games; online video games to be specific.

Don’t believe me? Well, just ask Gartner, who published a report in March of 2006 naming MMOG’s or Massively Multiuser online games as an important and sophisticated collaboration tool (Jones, Nick. “Playing the Collaboration Game”. Gartner. March 23, 2006. ID: G00129452). But let’s not get ahead of ourselves. The same report states that these tools are still not perfectly suited for the business environment because of “technical and social” inhibitions that include but are not limited to: culture clash and the need for sophisticated hardware.

But that's not to say that online games are not helpful to businesses and corporations. The potential of online games has managed to peak the interests of many in the corporate world. In fact, businesses have already undertaken several of their own experiments with virtual environments, aiming to benefit from their use. Take Virtual Reality Modeling Language, spatial audio conferencing, and Ygdrasil which is a special purpose tool to build virtual 3D worlds as some examples. But according to Gartner these have had very little success compared to MMOG’s. Why is that? Well for starters, MMOG's are fun and easy to use. They are also readily available, and there are no development costs involved. It’s precisely these qualities that make the future so promising. And if you’re still not convinced let me tell you a little bit more about the world of online gaming that you may not be aware of. There are several opportunities being created centered on the online gaming market. And if you think that playing games is a frivolous activity that is just for kids, you might want to read the rest of this blog…I bet you’ll be surprised.

Virtual World- Real Money
There is a whole virtual economy taking place, and it’s been around for a while. In an article published in 2005 by Knowledge at Wharton, a publication from the Wharton School at the University of Pennsylvania, Dan Hunter talked about the growing financial importance of MMOG’s: “Increasingly these virtual economies are translating into real dollars” (Try reading the whole article at http://knowledge.wharton.upenn.edu/article.cfm?articleid=1302 but you might need to create an account first). Just ask Linden Labs, the San Francisco-based game developer responsible for Second Life whose linden dollars hold a ratio to US currency. The reason behind that is that companies like Internet Gaming Entertainment began dealing in everything from magic shields to potions; which by the way the virtual audience can’t seem to get enough of as you shall see.

Edward Castronova, a Professor Indiana University, estimated this virtual economy to be worth between 200 million and 1 billion dollars in 2005 with the potential of hitting the 1.5 billion dollar mark. Hunter even saw these online virtual markets as having the potential of becoming “economic petri dishes to monitor consumer behavior, currency exchange and productivity”. And I can’t say that he was wrong. It’s true that companies like Linden Labs are beginning to take on the look and feel of a financial institution.

As a whole, most agreed, the market had a great potential for growth. The growth of the market even prompted the attention of the US government; something which I think is still in play. Still, with all that success no one thought at the time that a virtual world worker could earn a living, at least not in the US. The potential always lay in Asia, whether that is an underestimation of the US market I can’t say-let us remember that even today the market is still in its early stages. But the potential to make money has been there. The proof came in 2006 when Ailin Graef became Second Life’s first real millionaire (Read Business Week article here).

Could you imagine making a million dollars trading for something that wasn’t even real? Amazingly enough this happened in only 2 and a half years, and she started by making small scale purchases of real estate. And this type of spending hasn’t ceased in 2007. Consumers have increasingly become crazed for luxury goods. The market is so hot, that it’s even seen a flood of media, automotive, and entertainment brands establish their presence in second life (Read Business Week article here). Castranova was right when he said he expected virtual markets to be more “commercial”. But regardless of who is spending what, or where, this clearly demonstrates the value that’s buried deep within this virtual goldmine. That is if you can find a way to make those virtual dollars into real ones. I think that’s what online gaming has become. It’s creative, and it’s not limited by the constraints of the game industry of old.

Online in Asia
But what about the Asian market? Well, take Korea for example. 26-year-old Lim Yo Hwan is a superstar. But it’s not like he is an athlete or a movie star. The reason he is famous is because he is a gamer…professional gamer that is. He has a large number of fans flocking toward his website, and in 2005 alone 100,000 fans gathered just to watch him play World of Warcraft (Read full story here).

This is part of a cultural phenomenon taking hold of Korea. This is fueled by the fact the Korea is probably the country with the highest level of broadband connectivity. In fact according to a survey conducted by the Korean government in 2006, 30% of the population was reported to be a registered online gamer. And just like in America, virtual goods are traded for real cash. Nearly 3,000 Korean game developers combine for a total revenue stream of about 4 bn. This is a real passion which people are turning into a money market. And it has teens and even some adults packing the 28,000 baangs, or internet cafes to play online games.

It’s happening in China as well. The market for fantasy and adventure games in China is growing at an astounding rate of 50% per year. And according to IDC this trend will lead China to overtake Korea as the largest Asian market by the end of this year (Read full article here). That’s a 2.1 billion dollar market according to Business Week.

If this is a fledgling industry I wonder what it will be like when it is full grown. And just as proof that the industry is aging, competitors are sprouting up all over the place. Think that Second life is the only 3D –virtual reality game on the block? Think again. For my example we head back to Korea where Nexon is beginning to step on Linden Lab’s toes (Read full story here).

At this point I feel it necessary to make the following point: Online nowadays implies global. And whenever cultures collide you are bound to have friction. Online gaming is no exception. In an attempt to seize a piece of the Chinese and Korean markets, EA has recently acquired Neowiz. This is only one part of what has been on ongoing effort in a sense to “westernize” the content of the games; however, the efforts have not been very successful. Instead the markets under siege have found ways to make the content their own (Read full story here).This is certain to be an issue for the advertisers. A business model takes into account environment as well as the culture. In order to capitalize on the explosion taking place with online gaming, it’s necessary to take into account a global market and expand the project scope. But that is not to say that western games are not successful in Asian markets. It’s simply another case of what Dan Hunter was talking about. Credibility is a key issue. Just as the consumers must trust the emerging vendors, new markets must trust the content of incoming entities seeking to advertise, sell, or promote their products. Nonetheless, markets are opening up, and their potential value makes them hard to ignore. But it’s the internet, and of course internet gaming that is bringing these problems to surface just as it’s creating new markets.

From Consoles to Online
These trends have not been overlooked by the game console makers like Microsoft and Sony who have made a move to capitalize on this online craze. Microsoft has already launched its X-Box live which boasts of six million users and has online services which include buying games online and chatting with friends; and that’s on top of the ability to play with multiple players from all over the web. But now it seems as if they are in an all out brawl for supremacy. It’s almost as if the two systems can’t exist in the same market, well more so than usual.

For Sony it’s a matter of catching up. It has recently launched its latest version of the Play Station system. I here that its not going that well, but it has no choice as to whether the new system has the ability to link with the web. Moreover it has to deal with the fact that development costs are increasing for hardware gaming (Read full story here).X-Box incurred a great deal of costs on development of the 360 system alone. This was despite the fact that Microsoft had already tested the water with the original X-Box system (Read full story here). The fact of the matter is that if they want to survive the have to go the way X-Box did…live. Gamers want it therefore developers need it.

Still the MS system is expected to lead the market through 2009 and that is largely due to popularity of the online features, this is despite the fact that Sony is coming up with there own version of live (Read full story here). It’s not just about the software anymore (See the graph below from BBC). There is something very attractive about having the option to connect to millions and millions of other players. Microsoft has the first mover advantage, but I think the definitive factor is that it’s more like an actual computer. The online movement is so strong that standards are quickly becoming things of the past. If they are not completely done away with they have to morph into something that as a console is unrecognizable, at least in the traditional sense.


Online Gaming-Vegas Style
The internet is even competing with Las Vegas. Well, at least on some level. Though it may never compete in terms of experience, the amount of money spent gambling over the internet is indicative that this is a viable alternative for many gamblers. The difference is that those seeking to gamble have access whenever there is a computer around. The problem for Los Vegas would be to see online gambling become legal, which is already happening in many states. And although many are sticking to their claim that online gaming is not a direct form of competition it has prompted some established Casinos as to create their own online gaming sites (See video here).

This is not just a problem for Casinos. The United States government has cause for concern as well. Online gambling runs through almost 7 billion dollars a year, a large part of which comes from US gamblers. The problem is that some of that money is non-collectible. Countless users connect from home and transfer their money to private internet casinos which are often located of shore. There is of course no way to prosecute and that has caused the focus to shift on some banks that have previously provided financial services for online gamblers. The worst thing for the United States would be to have the UK legalize online gambling. The United Kingdom would then be able to take US bets and US dollars away from both casino and treasury coffers (See video here).

The internet has a unique ability to disassociate. The same property that allows processes to be separated from the analytical, is in this case what limits accountability and creates the problem that we se present with online gambling today. It’s a more sinister side of online gaming. However, it is important because it demonstrates the reach, and power of the internet. The funny thing is that it’s only a game. But that’s what you probably thought at the beginning of this blog- how can online gaming be used for collaborative training…it’s only a game? But we’ve seen that virtual reality has some unique properties that translate into the real world.

Signing off
I honestly believe that we are only taking a glimpse of what can be done using video. Broadband has been the vehicle that has propelled online gaming into the homes of countless individuals all over the world. But it has also transformed gaming into something more than a form of entertainment…something that can be a new business opportunity or a great tool for collaborative training.

As for the video game industry itself, the inclusion of the internet is changing the way that games are being made and developed (Read article here). However this hybrid has revealed stored potential perhaps not seen in years past. Online gaming has become a conduit for innovation that is responsible for entities like second life. It now has the power to alter orbit industries, and has really added to the creativity of creating business models. Moreover it’s also offering new sources of revenue for brick and mortar companies (Read full article here). Going online has added to the arenas that gaming can reach, and I think that it will continue to add to the list of possibilities….perhaps even in the financial sector.

Wall Street's Need for Speed

I started this blog talking about algorithmic trading. Not only that, but I even made a prediction- algorithmic and electronic trading would overtake floor traders in 2007.It had been a long time coming, and everything seemed to indicate that electronic forms of trading would become the premier means of trading on Wall Street. Well, the ballots have been cast and the results are in.

Information week recently published an article in which it states that electronic trading now makes up 60% to 70% of all daily volume on the NYSE. Algorithmic trading came in a close second with half of that. At the closing bell on April 4th NYSE officials vigorously rang cowbells in an attempt to drown out a combination of not-so-warm boos and jeers coming from the floor traders. The reason why: the NYSE has recently decided to merge with Euronext NV. This is all part of the NYSE’s plan to diminish the data latency of trade processing. What does that mean for floor traders? Their jobs are in peril!

The New York exchange is moving many algorithmic traders as close as possible to the exchange to cut down the processing time of transactions to a few milliseconds. The goal is to give e-traders that split second timing which could very well translate into millions of dollars in gain. The NYSE plans to reduce its data centers as well as those associated with Euronext in the next couple of years.

You see, every day algorithmic trading systems generate countless buy and sell orders. A great number of these are canceled or overridden by subsequent orders. By manipulating the time a processes is allowed to run and hiding their true intentions (“time-slicing”), or by breaking down orders in to smaller batches, the e- traders can capitalize on what Information Week writer Richard Martin calls “fleeting price anomalies”. The problem is that executing transactions takes time, and it takes even longer when the two computers processing the deal are further apart.

It’s all about how fast transactions can be carried out. This is putting floor traders out of work. But it’s also leading to some new developments. Remember those developments I was talking about? Well, it turns out that this need for speed may be opening the door for e-alternatives to compete with existing markets. By allowing buyers to respond to small price fluctuations, electronic trading has diminished the volatility of dealing in equity markets, and has given birth to a whole new type of vendor that promises even faster transactions speeds.

But it’s not all bad. The exchanges themselves do have some benefits to talk about. Because physical proximity can eliminate the time lags, these have experienced a spike in demand for server space. In fact the NASDAQ has now has over 100 firms paying a premium of 3500 dollars US per rack ,per month to place their servers within the walls of the exchange.

It may sound insignificant. I mean what is the big deal right? It’s only a few seconds. According the Martin it currently takes 7 milliseconds for data to travel between New York markets and 35 milliseconds between the coasts on the fastest network. But that’s slow, at least according to Yaron Haviv. Haviv is the CTO of Voltaire, the company
who is supposed to be able to cut down processing time to 1 millionth of a second.

Trust me this is not a trend that is likely to stop. Government regulation is taking a big part in making this happen, and traders (those that are left) are being forced to rely on automated systems with greater and greater frequency. Many organizations are already buying into the idea. Take Credit Suisse for example. It currently handles 10% of all US equity trades, and it is already one of the largest co-location customers out there. The question is when will these transactions be carried out fast enough? - and when they do what’s next?

If you want to read the full article click on the following link. < http://www.informationweek.com/story/showArticle.jhtml?articleID=199200297>

The Brute Force Approach

Wall Street executes financial operations every single day. However, most of those tasks do not generate revenue yet they still incur cost. That’s a problem; obviously, especially when you consider that these tasks are done more than once. I know, I know that's a definite understatement. The point is that cost keeps increasing.

A few years ago banks started looking for ways to solve this problem. The answer they came up with was “grid computing”. In fact they invested 120 million dollars in it just last year. They needed more power and they got it. Makes sense right? Wachovia and JP Morgan have been investing in this technology since 2001, even the Chicago Stock Exchange got in on the act as early as 2002 when they purchased Oracle 9i RAC. Celent and Hersh predicted that investment in “grid technology” would increase to 500 million by 2010. Banks were able to decrease cost by leveraging their relatively inexpensive hardware. Problem solved right? Wrong. (For more info see: < http://www.wallstreetandtech.com/showArticle.jhtml;jsessionid=Q0U5FSIPLYWAMQSNDLOSKHSCJUNN2JVN?articleID=187203197 >)

That was 2006. This year Wall Street’s computational needs have increased and so has its cost. Consider this: Each Intel chip requires roughly 75 watts of power, multiply that by the thousands needed for the operations they perform and that’s a lot of money…way more if you throw in cooling costs. So what new answers have they come up with? One of those answers is “multicores”. Basically Intel and AMD have just increased the number of processors they give these banks. Intel has even developed an 80 core-chip, which they claim uses less energy than a household appliance. However, whether it will actually hit the market is still not certain. Accelerators are also popular and they too come in the form of chips. But whether they are GPU’s or FGPA’s they are still aimed at achieving the same goal...increasing your computational power. But that just seems like throwing money down the drain- it's hopeless! (For more info: < http://www.wallstreetandtech.com/showArticle.jhtml;jsessionid=BRQCSHECZUQO4QSNDLPCKH0CJUNN2JVN?articleID=198001925 >)

I’m exaggerating, but I do think that there have got to be better ways to approach this problem. I think Merrill Lynch has a good idea. They’ve already outsourced some of these processes (See above link). So has Wachovia. Well, not completely. They’ve actually developed a system to allocate system capacity based on how “mission-critical” a process is using IBM software. (For more info: < http://www.wallstreetandtech.com/showArticle.jhtml;jsessionid=3T0VLFLYHOBJUQSNDLRSKH0CJUNN2JVN?articleID=198001931 >) Why keep beating around the bush? I know, it’s not like these banks are designing an information system, but the costs are still significant. Rather than invest in processors, or blade racks, let someone else do it. SOA…or even SaaS, I’m just throwing things out there. But of course there is no perfect solution. As my friend Benson was kind enough to enlighten me, there are still problems that can arise with resorting to web-services; take DoS for example. That could be an issue when dealing with sensitive financial data. But does that mean that businesses are slaves to high performance computing and its insatiable lust for power?

Pump and Dump Version 2.0

I recently read on article about this vast underworld in cyberspace. It turns out that information systems containing the worlds data …and precious financial data are not the only things becoming more advanced, but so are the methods of hacking into them. It’s a world that’s as devious as the more sinister underbelly of society that has become infamous thanks to Hollywood. Ransom schemes, credit card information; which by the way is sold for as low as one dollar a piece, “fencing” items over chat rooms…it’s all happening right under our noses. Not to mention the so called credit card dumps acting like a techie version of the weapons trade. These networks are highly mobile, moving around about every six months. And the funny thing is that these guys are using things like Pay Pal to close out their transactions.

But of particular interest at least to this forum is not the viruses or “malware” being created and sold as if it were a commodity, and it’s not to focus solely on the technological aspect, but rather the way in which this is changing finance. Take young, bright criminals, and add a whole array of high tech tools and your get a new way to commit crimes. Remember the old “pump and dump” scam; think you know what it’s about…well think again.

Hackers are breaking directly into online brokerage accounts and liquidating entire portfolios…after they have made a bundle of course. After buying a ton of shares using compromised funds on E-trade or Ameritrade they manage to artificially raise the stock price and then sell of their shares to the surprise of other investors who in turn experience a sharp drop in the price. What looks legitimate is actually a scam so be careful. The question is how you stop it. You can’t. At least not right away. Last year E-trade reported an 18 million dollar loss in its third quarter due to similar scams. It’s not like you can stop everyone from trading. How then do you stop the fraudulent accounts being created every day? Or do you just learn to live with it as Marc Gaffan, director of marketing for the RSA points out? I know the secret service is on the job, but what are the result that we can expect?If you want to learn more try and take a look at the whole article < http://www.informationweek.com/story/showArticle.jhtml?articleID=197004939>.

Social Networks in Finance?

Forget about the space age. It feels more like the MySpace age. And by that I’m simply stating what has probably become apparent to everyone…social networking is in. It’s everywhere, and if you don’t believe me you just might want to ask the nine year old next to you. It’s true, websites like club penguin, Habbo Hotel, and Imbee.com are already introducing social networking to tykes (Find out more at: <<http://www.msnbc.msn.com/id/17266131/site/newsweek/>>). That’s right tykes!

This is serious. How serious? Well, let me just say that about 10 to 20 states are considering imposing strict regulations on social networking sites. True, the legislation is intended to protect children from sexual predators, but the point that I’m trying to make is that social networking is getting a lot of attention (<<http://www.informationweek.com/story/showArticle.jhtml?articleID=197801465>>). And it seems like it’s only going to get worse; or better, however you want to look at it. Mark Zuckerburg, the creator of Facebook, certainly isn’t complaining. I wouldn’t either if someone told me that my website had the potential make 100 million dollars in revenue this year alone (<<http://www.msnbc.msn.com/id/17285000/>>). It seems everyone is getting on board. Even Sony is in the works of unveiling its own online network (<<http://www.msnbc.msn.com/id/17504219/>>).

But even with all that’s going on, the following news came as a shock. Social networks within the financial community? I know, it sounds unnatural. However, Microsoft’s latest brainchild aims at creating a series of communities focused around work roles; the latest of which is the as of yet unnamed forum for financial professionals. It’s true that there are already similar products offered by IBM and sites like CFO, but Microsoft is promising a more dynamic product (<<http://www.informationweek.com/story/showArticle.jhtml?articleID=198000284>>). My question is what does that look like? I’m sure that there is a well intentioned idea in there somewhere. But I can’t help but wonder what the ramifications are of having financial professionals talk to one another. That is, looking at it from a corporate perspective? I wonder if it’s going to take off, and it’ll be interesting to see the way these forums are used and what they are used for.

The Market and Algorithmic Trading

Hello my name is Pedro Villanueva and I am a student at the Marshall School of Business located at the University of Southern California. I’m currently a junior majoring in Business Administration and concentrating in both Information and Operations Management and Finance. I am a Los Angeles native, and love soccer. I have an interest in both technology and finance and that is why I have decided to write this blog.

Today it’s nearly impossible to talk about finance without technology. That’s why this blog has a particular twist. This is about finance in the age of technology. The effects are undeniable and inescapable. That’s why it’s necessary to understand the way in which IT is changing the way we do business. At least I think so. I’ll be updating this blog periodically so please check back and feel free to join in. And to get things started I’ve decided to take a closer look at a major development in the world of financial markets that’s not especially new, but its nevertheless important and will continue to make an impact this year.

Algorithmic Trading
Algorithmic trading impacted Wall Street about two years ago. The technology allowed for large orders to be broken up and fed back into the market in smaller more digestible pieces. Customizable and less expensive than a traditional broker, the question then on the minds of many was whether or not the new technology was secure. In April of 2005 Business Week printed an article in which it was argued that the “predictability” of the algorithms themselves made it easier for more experienced traders to identify trading patterns and then capitalize on those patterns (Click here to learn more). Interestingly enough within the same article lay buried, and perhaps overlooked, the Aite group’s prediction that algorithmic trading would account for more than 40% of equities trading in all markets.

It seems that the market has been myopic as to the potential of the new technology. It may well be the case that there is a necessary learning curve, but it has been several years since the induction of algorithmic trading and there are surprises that continue to surface. My question is whether all of Wall Street has considered exactly how disruptive this disruptive technology actually is and what it means for future trading?

For example, it was initially thought that algorithmic trading would help recapture the commission revenues lost to electronic trading, and I don’t think anyone could have anticipated the shift that the market actually took. JP Morgan’s own Emily Portney would elaborate on the transition then gripping the market which was labeled as a move “from traders to tech supporters” that very same month. (Traders to Tech Support) More surprising was NYSE’s decision to merge with a then 8-year old Archipelago (Repaving Wall Street). While none found NASDAQ’s decision to enter into its own union with Instinet odd, it did seem odd to me that nation’s first electronic stock market (NASDAQ) should make such a decision as a means of necessity rather than as a means for strategy. Did NASDAQ fully understand the business altering nature of algorithmic trading? I don’t think so. I don’t think that the NYSE did either. Why you might ask. The reason is because at the time the NYSE still retained the hope of creating hybrid markets with trading done both electronically as well as on its own floors. Perhaps this is a naïve view at best at least when you consider what happened next.

As early as 2006 a whole new market was created for customized algorithms and strategies (Algorithm Marketplace). This is far from the hybrid dream first fostered by the NYSE. Tim Ferguson later published an article in which he writes that potentially 90% of traders faced the problem of unemployment because of the emerging technology (Tim Ferguson). This is at the same time when the London Stock exchange was already making arrangements to handle a greater volume of trades through electronic means. Did the realization come late in America? Apparently it did especially when you consider the debate that still existed at the end of last year over the transparency around algorithmic trading (Transparency). It could be that the American marketplace has been reluctant. That is what it seems like to me, however I don’t know why when there are numerous indications that this is a trend that unlikely to stop. I believe that new software, globalization, and an increasingly e-mobile audience will likely not only further the advancement of algorithmic trading, but also lead to new developments as well. What those developments are exactly I’m not sure, but somewhere someone is on the job. The point I am trying to make is simply this: The "old way" of trading is slowly being phased out, and it will becoming increasingly difficult to ignore the disruptive nature of this new technology. And it's not only algorithmic trading, the number of trades done electronically is growing all the time.

2007 will be a year which I think will prove my point and I think that many agree especially with the arrival of vista and web 2.0 (Algorithmic Trading Goes Mainstream). And if Wall Street has anymore doubts as to whether this is a fad they only need to consider the 416 point plunge in the market in late February because of the high volume of transactions done through electronic trading (Electronic Trading). It must be increasingly apparent that the “old way” of trading will continue to struggle if not for some help from IT. In fact it’s necessary, especially for those that have their eyes set on markets overseas. For a long time, we’ve used information technology to help bridge the gap between us and other markets why should trading be different? IT has succeeded in making trading both easy and cheap, now it’s necessary that it address the needs of traders everywhere. Competitors such as E-trade will surely not be shy to jump at the chance, and are already taking steps to eliminate existing borders (Global Trading).