Second Life Brokerage

Yesterday, L&L Bank and Trust issued this statement about what they have been up to. Of interest to many is the addition of brokerage to their services. What will this really look like? Xavier Mohr addresses the idea here. Will this be the first brokerage, or a sixth exchange, Xavier asks. Is this a good or bad thing?

It will all depend on the execution, and so far, it is too early to tell. LNLBT is using the same underlying software as both SLCapEx and ACE. Currently, they list seven stocks, totaling around 375,000 shares at a listed price of around L$ 490,000. Since setting this up, 160 shares have been purchased.

However, those shares purchased are listed as part of an LNLBT IPO. As such, it would appear as if there is no way to cash out of your shares until all the shares in the IPO are sold. This presents a chicken and egg situation. I wouldn’t buy shares until they are out of IPO, and at least right now, it looks like they won’t come out of IPO until all the shares are sold. To get around this, LNL should follow Xavier’s advice and act as a market maker. They should allow people to buy and sell shares now with their bids and offers making the market. If they want to add some real value, they should allow investors to short stocks. That would make the markets much more interesting.

Until stocks start trading actively, it won’t be all that interesting. When that happens, it will be interesting to see if the data services functionality that SLCapEx and ACE provide will be available LNLBT. If so, then smart programmers will be able to take amalgamated feeds and start coming up with even more interesting signals. If short sales are allowed, the signals will become even more interesting. Likewise, the ability to transfer stocks from being held by LNLBT on a traders’ behalf, to the exchanges records would make the functionality all the more interesting. I could short stocks on LNLBT and buy them on the exchange for arbitrage values. The ability to transfer stocks would eliminate liquidity concerns.

Without any of this, the one thing that LNLBT offers which is missing from the current exchange offerings is the ability to easily deploy funds to stocks in any exchange. Right now, when I want to do that, I stop by at one of many locations where there are ATMs for the different exchanges, withdraw money from one exchange and deposit it in another. It is a little bit of a drag to do that, but not worth the loss of liquidity that I fear trading in LNLBT would produce.

From an exchange perspective, it is hard to find any benefit of LNLBT’s plans. Right now, the exchanges make their money when a trader sells their stocks. If these sales take place on LNLBT, the exchange won’t see the profit, instead that will end up in LNLBT’s pocket. That is, of course, except for any transfer of stocks that might happen through the exchange, if LNLBT provides that as a possibility.

To address these concerns, it would seem beneficial for exchanges to facilitate interexchange transfers. If I could reliably transfer funds between exchanges using the exchanges websites, the motivation to use a brokerage firm like LNLBT diminishes further.

This isn’t to say that there aren’t a lot of great things that brokerage firms could bring to Second Life. Beyond adding the ability to short stocks, the ability to trade on margin, the ability to trade baskets of stocks, exchange traded funds, and so on, could make trading in Second Life much more interesting.

Will LNLBT provide these sorts of functionality? We will have to wait and see.

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