The new wave of liquidity: Impact of friction - SSRN papers

Institutional

The new wave of liquidity: Impact of friction

Shahin Shojai Director of Strategic Research, Capco

Samuel Wang Global Head of Marketing & PR, Capco

Abstract On the fourth anniversary of the original paper by Shojai and Hahn we will look at whether any of the predictions made in that article have come true. The authors suggested that revolutionary technologies, such as the Internet and wireless devices, would over time make it possible to derive value from previously less liquid or even unrecognized assets, and that the aggregate effect of such value liberation would be ‘a new wave of liquidity, which will engulf the global economy and result in substantial increases in liquidity around the world.’ They further suggested that for this value liberation to take place, each of these previously illiquid, and in certain circumstances even unrecognized, assets would need to go through a four-step process: reduction in friction, value release, asset pricing, and asset recognition. We find in this paper that while a number of these predictions have come true, the degree of transformation that was envisioned in the original article are still far from becoming a reality.

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It has been four years since Shojai and Hahn (2001)1 first sug-

that previously relied upon customer loyalties, customer apa-

gested that revolutionary technologies, such as the Internet

thy, and market frictions, to retain clients.

and wireless devices, would over time make it possible to derive value from previously less liquid, or even unrecog-

Buyer empowerment has not been limited to individual con-

nized, assets, and that the aggregate effect of such value lib-

sumers. There are many examples of institutions and corpora-

eration would be ‘a new wave of liquidity, which will engulf the

tions either pressuring, prosecuting, or switching their financial

global economy and result in substantial increases in liquidi-

services providers when their needs have not been fully met.

ty around the world.’ Financial institutions have responded to these changes in cusThey further suggested that for this value liberation to take

tomer behavior by developing new tools and methodologies,

place, each of these previously illiquid, and in certain circum-

often using the same technologies that liberated their cus-

stances even unrecognized, assets would need to go through

tomers, to better meet client needs and improve how they

a four-step process: reduction in friction, value release, asset

price their services to the different segments of the market

pricing, and asset recognition.

[MacDonald and Caufield (2005)3, Holden (2005)4, Wuebker (2005)5].

This paper aims to review some of the suggestions made in that original paper, assess whether any of the predictions

In addition to facilitating transparency, new technologies

have come true, and determine what factors have been

should help mitigate, if not eliminate, many of the frictions

responsible for preventing the new wave of liquidity from

that exist in the markets today. For example, financial institu-

becoming a reality.

tions could operate in a much more efficient manner if their differing systems could talk to one another, and even yet more

The new wave of liquidity

effectively if they could communicate seamlessly with systems

A very important attribute of the Internet, and the many new

of other institutions [Dizdarevic and Shojai (2004)6]. To take it

mediums of exchange, has been the shift in power from sup-

a final step, seamless communication would become truly effi-

pliers of goods and services to buyers. Even within financial

cient with the elimination of fees and other related charges

services, we have observed that due to the increased trans-

that currently drain customer loyalty.

parency, brought about as a result of improved quantity and quality of information, and falling switching costs, assisted by

However, while creating seamless communications within and

more conducive regulation and increased competition, con-

between institutions is a noble objective, the potential value

sumers are now much more powerful than they were prior to

release that individuals could experience due to these revolu-

the advent of these new technologies. We have seen exam-

tionary technologies could be substantially more profound.

ples of consumers changing banks or credit card providers

These technologies should make it possible for individuals to

when new and more attractive offers are made available

release the value locked up within many of their everyday

[Furletti (2005)2]. Websites that rank different providers of

assets, from stocks and bonds to more intangible assets. In

retail financial services — including super retailers (such as

order to achieve this objective, the assets were suggested to

Wal-Mart), grocery chains (such as Tesco), and utilities (such

embark on a four-step process before their value can be truly

as gas or electricity companies) — have made it possible for

liberated. These steps are reduction in friction, value release,

consumers to quickly and efficiently compare and contrast

asset pricing, and asset recognition, and can be viewed as fol-

their offerings, and even switch providers instantaneously.

lows:

These technologies have made it difficult for organizations

1

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Shojai, S., and N. Hahn, 2001, “The new wave of liquidity,” Journal of Financial Transformation, 2, 7-21 2 Furletti, M., 2005, “Credit card pricing developments and their disclosure,” Journal of Financial Transformation, 13, 57-66 3 MacDonald, K., and S. Caufield, 2005, “Propensity-based pricing,” Journal of Financial Transformation, 13, 17-18

4 Holden, R. K., 2005, “All banks are not alike, Getting out of the commodity trap,” Journal of Financial Transformation, 13, 22-24 5 Wuebker, G., 2005, “Powerful pricing processes: How banks can escape the profit crisis,” Journal of Financial Transformation, 13, 25-29 6 Dizdarevic, P., and S. Shojai, 2004, Integrated data architecture — The end game,” Journal of Financial Transformation, 11, 62-64


■ Reduction in friction — For assets that are already highly

Proliferation of liquidity

liquid, such as financial assets, achieving optimal liquidity

One of the main contentions of the original Shojai and Hahn

requires transaction processes to become substantially

article was that there are far too many stock exchanges in the

more efficient.

world and that consolidation could help reduce fragmentation

■ Value release — For assets traditionally recognized and

priced, such as cars and property, efficiency of information

of liquidity and costs — such as those incurred in trading, settlement and clearing, and other explicit fees.

dissemination and the competitive environment within which they are exchanged must be significantly improved.

In the United States, the New York Stock Exchange recently

Furthermore, owners of these assets must have options

bought a major electronic trading firm, Archipelago Holdings

available to them that are alternatives to selling the

Inc., giving the NYSE an enhanced electronic trading platform

underlying asset, such as securitization, which we see as

to compete more directly with its rival NASDAQ. The very next

one of the most profound innovations within the financial

day, NASDAQ announced its intention to buy Instinet, in which

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services industry . ■ Asset pricing — For assets that are recognized but not

Reuters has a majority stake. NASDAQ intends to keep Instinet’s electronic trading platform but sell its institutional

priced, such as collectibles, transparent and liquid markets

brokerage unit. Both deals are intended to generate scale and

need to enable correct pricing. Companies such e-Bay

liquidity, improve pricing, and diversify products, such as

should be commended for significantly improving the liq-

options and exchange traded funds. The result will be a mar-

uidity of these types of assets.

ket environment in which the NYSE and NASDAQ engage in

■ Asset recognition — Some intangible assets have as yet

truly direct competition. However, neither deal was cheap,

not been truly recognized, such as human capital, ideas,

notwithstanding the fact there will be offsetting benefits from

earnings potential, and excess capacity of various kinds.

greater public accountability by investors and regulators, par-

Identification of these assets is essential if we are to make

ticularly for the NYSE. As we detail below, it is too early to

full use of the Internet’s potential. When these assets are

determine whether the anticipated operational scale, efficien-

recognized, valued, and traded, we will accomplish our

cy, and cost savings will actually materialize.

goal of liberating the full potential value of all assets [Shojai and Hahn (2001)].

In Europe, the announcement of the creation of Euronext, the merger between the Paris, Brussels, Amsterdam, and more

Shojai and Hahn (2001) maintained that once the asset recog-

recently Lisbon, exchanges, was expected to be followed by a

nition and pricing process had been completed, individuals

number of other combinations in this space. However, this has

could liberate the value locked within their assets through

not transpired. While there are discussions that the London

either outright sale or, more importantly, securitization, by

Stock Exchange might merge with one of its European coun-

selling ‘the future revenue potential of the underlying asset

terparts, Euronext or Deutsche Borse, it has still not tran-

without relinquishing ownership.’

spired, and with Mr. Seifert’s recent departure from the latter the chances of a combination now seem even slimmer.

While the types of assets that were suggested as suitable for value release are of interest, this paper will focus on the major

Interestingly, while most of the major exchanges have been in

changes that were suggested in the original paper and deter-

merger discussions, smaller exchanges have generally

mine whether or not they have taken place.

remained independent, despite having a lot more to gain from consolidating with major exchanges. Nevertheless, the question remains as to whether investors gain as a result of these

7 Interestingly, reverse house mortgages have recently taken on life in the United States with senior citizens seeking to enjoy their golden years.

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stock exchange mergers. According to Malkamäki (1999)8,

1999

2000

2001

Percentage change (1999-2001)

25.17 28.73 24.55 30.5 71.74 36.51 24.87 34.16 33.28

22.06 29.28 28.39 38.81 72.74 33.58 33.83 38.97 36.34

19.92 30.67 32.18 35.93 69.01 36.65 36.95 37.24 38.60

79.14% 106.75% 131.08% 117.80% 96.19% 100.38% 148.57% 109.02% 115.99%

merging two national exchanges would result in operational cost savings of around 40%. Translating these savings into reductions in costs of trade are not, however, easy to ascertain. Similarly, we are unable to determine the potential implications of aggregating the two sources of liquidity into one on the market impact of large institutional trades. The alternative investments market is another example of a market that could benefit from increased liquidity. We have seen that regulations are being introduced to make this a real-

Japan Germany US - NYSE UK - sells UK - buys Switzerland France Italy US - NASDAQ

Figure 1 — Overall cost of executing trades (basis points) Source: Elkins/McSherry

ity. For example, there are now vehicles that allow retail investors to invest indirectly in hedge funds. However, retail

Efficient operations

participation in alternative investments remains low, mainly

As mentioned above, the main anticipated benefit of consoli-

because transparency, standardized pricing, accurate valua-

dation among exchanges, is the reduction in operating costs,

tions, performance measures, and operational risk manage-

which should in theory be passed on to market participants.

ment are still not at the levels that will make retail investors truly comfortable. In addition, as more hedge funds are

However, as we can see from Figure 1, this is not necessarily

launched, margins will likely shrink, as more participants fight

the case. Between 1999, the year before Euronext was estab-

for a smaller number of profitable opportunities. Neverthe-

lished, and 2001, the cost of trading French stocks in Paris has

less, in those markets where retail participation has occurred

gone up by around 50%9, 3 times the average of the other

the benefits have been quite tangible.

major exchanges. In fact, the increase has been so pronounced that the cost of trading shares in Paris has gone from

Disruptive technologies have also left their marks on the fixed

being around 30% less than Frankfurt in 1998 to being 20%

income, currencies, and derivatives markets, with online trans-

more in 2001. This goes against the logic used to justify con-

actions increasingly taking on more prominence. However, in

solidation among exchanges. Unlike Paris, however, the Tokyo

order to achieve the level of liquidity that issuers and investors

Stock Exchange seems to be the market which has become

demand, these online markets must open their doors to retail

very efficient for investors. It has reduced costs of trading by

investors, by creating the kind of environment that will make

over 20% during this period10.

them feel sufficiently comfortable and safe. We have attempted to ascertain the cost savings that could Ambitions for greater liquidity should be matched with

accrue if all markets were as efficient as Tokyo. However, given

increased efficiency in how the support mechanisms operate,

that what matters, or at least can be influenced by the effi-

such that over time currently prohibitive costs can come down

ciency of the market, are the explicit costs, we compared the

and further reduce barriers to entry.

explicit costs of a return trip (buy and sell) within all markets and found that NASDAQ is by far the cheapest market. Paris, by contrast, is the most expensive market, with costs over 8 times those of NASDAQ. In order to ascertain the savings that could accrue from all

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journal of financial transformation

8 Malkamäki, M., 1999, “Are there Economies of Scale in Stock Exchanges Activities,” Bank of Finland Discussion Papers, 4/99 9 Kindly note that these figures include both explicit, such as commissions and taxes, and implicit costs, such as market impact. 10 Of course currency movements also impact these rates, but not in the case of Euronext, Italy, and Deutsche Borse, which all use the Euro.


markets being as cheap as NASDAQ, we made a number of

long, laborious, and risk prone process of settlement and

very conservative assumptions. The first was that the assets

clearing must ensue.

of each portfolio are turned over once a year, although the industry average is believed to be closer to two, and in fact

Every time an individual or an institution buys a financial

now probably higher due to the aggressive trading strategies

instrument, the transfer of ownership can take a few days and

of hedge funds. Secondly, we used the United States as the

can involve many hours of manual data entry. The number of

proxy for the proportion of the stock market capitalization

days it takes for the ownership of a share of stock to be trans-

owned by the major institutions, i.e. 55%. Using the national

ferred from the seller to the buyer, for example, can vary

stock exchange information available in the SIA Fact Book, we

between four days (T+3) to six days (T+5), depending on the

computed the total amount of stock exchange assets owned

market in which the transaction takes place.

by the major institutions in the aforementioned markets in 2001.

Given that the two largest stock exchanges, NYSE and NASDAQ, alone experience daily transaction volumes of in excess

We then multiplied the size of assets owned by the major insti-

of 3.4 billion shares means that the current system is fraught

tutions by the cost of a return trip, i.e. purchase and sale of

with risks. The true cost saving benefits from the acquisitions

shares. We found that in 2001 the explicit costs of trading equi-

by the NYSE and NASDAQ, while certainly desired by both

ties in the major stock exchanges came to approximately

exchanges, remain to be seen.

U.S.$96 billion. If the major markets were able to operate at the levels of the most efficient market, i.e. NASDAQ (6.59 Bps),

At the time of the original article, there were anticipations

that cost would have come down to U.S.$18 billion, a savings

that the U.S. markets would reduce settlement times and

of U.S.$77 billion. The NPV of that figure is U.S.$770 billion,

move to a T+1 environment. The calculated benefits of such a

which is equal to 3% of the overall market capitalization of

move for the U.S. was calculated to have an NPV of U.S.$19 bil-

these major markets. When we compare the savings that can

lion for the U.S. markets, and U.S.$40 billion globally. The

accrue from lower explicit costs in 2001 with those of 1999,

move to T+1 has as yet not transpired.

which was around U.S.$40 billion, we find that the situation is actually getting worse. The gaps in explicit costs of trade are

Improving banking operations

widening rather than narrowing. When you take into account

There is little doubt that the banking industry could benefit

that one of the exchanges has already merged with three of its

from consolidation, and there has indeed been signs of it in

peers to create Euronext, we see that unlike what many of us

recent years, although not at the levels many had predicted

would have thought, mergers among exchanges do not neces-

back in 2001. Nevertheless, the number of commercial banks

sarily benefit investors.

in the U.S., where the merger activity has been most pronounced, has gone down from 10,960 in 1993 to 7,769 by the

Overall, we can state that the stock exchange mergers have

end of 2003, a 30% drop. However, despite these activities,

not been as beneficial as we had expected and that the pace

the performance of the banking industry, at least from a

of consolidation among national exchanges that many had

shareholder’s perspective, has not been that impressive.

predicted has yet to materialize.

Figure 2, which compares the performance of the S&P’s banking stocks’ index with that of S&P 500 illustrates that despite

Of course, costs of trading equities do not end there. Once the

a number of efficiency generating mergers, the performance

transaction has been completed on the exchange, ownership

of banking shares is no different to the weighted average of

of the asset needs to be transferred, and consequently the

the top 500 stocks.

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140

fear that increased security measures (well beyond the cur-

120

rent ‘username’ and ‘password’ logins) will impair customer

100

loyalty, even with present guarantees of full reimbursement for any stolen funds.

80 60

Nevertheless, as was predicted in the original article, the 40

existence of online banking, and the associated increase in

20

S&P500 S&P500 Bank

June 2002 is set at 100

0 Jun-02

Sep-02

Dec-02

Mar-03

Jun-03

Sep-03

Dec-03

transparency, has helped improve the level of service clients receive and the rates they are offered. This is likely to con-

Mar-04 Jun-04 Sep-04 Dec-04

tinue as price wars to secure market share continue and Figure 2 — Comparison of the performance of S&P 500 Index and S&P 500 Bank Index

services, such as online bill payment and funds transfer, improve, particularly at online brokerages. In addition, online banking will transform as customers become more comfortable with its underlying technology and security, and as

The results are not, however, that surprising when one takes

banks learn how to brand themselves as new generation,

into account that very few bank mergers meet the objectives

customer-centric financial institutions.

set out at the time of the combination. In fact, bank mergers do not perform that much better than their peers in other

Outsourcing

industries.

There is no doubt that if companies structure an outsourcing deal properly there are many benefits that can accrue from it.

If banks are not able to generate additional benefits by merg-

An extension of a typical outsourcing deal is offshoring, where

ing, how would they be able to generate greater efficiencies?

the services are outsourced to a third-party, or even a captive

The original article suggested two sources, online banking and

center, based in a cheaper offshore location. Structures of

outsourcing.

these arrangements are becoming ever more complex and innovative, such that now banks even outsource the manage-

Online banking

ment of their payments to peers [Gaertner (2004)11].

What we have learned in the past few years is that while

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online banking services do provide clients with a useful chan-

Shojai and Wang (2003)12 highlight many of the benefits of off-

nel to their accounts, online banks per se, those not tied to a

shoring and discuss how new technologies have made it pos-

brick and mortar operation, have not been very successful in

sible to arbitrage human capital. Through these disruptive

penetrating the market. We still believe, however, that the

technologies, Shojai and Wang argue, the world has been able

power of pure online players should not be overlooked, espe-

to export wealth to poorer countries in ways not even

cially as the use of digital money increases. More than 100

dreamed of twenty years ago. Of course, they also highlight

million households worldwide currently bank online, and esti-

the problems that the treasuries of the first world countries

mates show this number may triple by the end of this decade.

face when jobs are lost to overseas locations and the number

Added pressure on online banks has emerged in the form of

of productive immigrants falls. This is one of the few areas

security breaches and data theft, especially in the United

where disruptive technologies have been able to truly trans-

States, which has fewer and less effective security measures

form the world of business, and especially that of financial

in place than Europe. Ironically, costs to implement security

institutions — organizations that are very conservative in the

are a major hurdle in the United States, and its banks also

way they look at the world.


11 Gaertner, W, 2004, “New models of collaboration in transaction banking,” Journal of Financial Transformation, 12, 116-119 12 Shojai, S., and S. Wang, 2003, “Transformation: The next wave,” Journal of Financial Transformation, 11, 11-16


Individuals

U.K. government’s planned ‘pay-as-you-go’ road charge plan.

Many of the benefits that were predicted in the original paper

Under this plan, car owners would no longer be required to pay

concerning the revolutionary implications of disruptive tech-

annual road tax in order to be able to drive on the roads, which

nologies have not transpired. However, there are some distinct

significantly helps those that rarely use their cars. Those driv-

benefits that have resulted from the existence of these new

ers, however, who do use their cars more regularly would pay

media of exchange. In the original paper, Shojai and Hahn

for the amount of driving they do, with the fee rising during

highlight a number of assets that individuals hold which could

peak times and in peak areas. In other words, drivers that

be exchanged if the vehicles were available that would allow

rarely use their cars would no longer be required to subsidize

for their transfer. One of the most interesting developments in

those who drive a lot. Now, if the government also provided a

recent years has been the growing market for credit transfers

number of miles for free each month, and allowed these

between individuals. Given that credit ratings of individuals

excess miles to be transferable, a similar market to excess tax

have to a large extent become commoditized, individuals can

capacity could be created.

just as easily evaluate the credit worthiness of other individuals and lend to them directly, dis-intermediating the banks

Sadly, due to regulatory limitations, and perhaps lack of inter-

from the process. For example, a new market proposition

est, a product market has not yet developed that would allow

called Zopa, which has been authorized by the U.K.’s Financial

for these excess capacities to be exchanged. Of course, this

Services Authority (FSA), allows individuals to lend directly to

does not mean that over time such a market cannot be creat-

one another. The risk of default is reduced by spreading the

ed, as the size of the monies generated from these markets

loans provided across more than fifty borrowers and limiting

increase to a threshold that generates adequate interest.

the exposure to each borrower to £200 (approximately

Given the lower cost of entry that new technologies create,

U.S.$400). Each borrower decides the level of risk they are

should more conducive regulation be introduced that simpli-

willing to bear, which in turn determines the rate they receive.

fies the process of excess capacity transfer, the threshold

This is very similar to the credit capacity exchange that was

needed for creating such a market will be significantly lower

suggested in the original paper.

than it was just a decade ago.

Two other less dramatic, yet quite interesting developments

Overall, however, we can state that despite the success of a

have come from the motoring industry. The first is the ‘pay-as-

number of online facilities for exchanging credit and certain

you-drive’ insurance schemes, where drivers only pay when

goods and services, we are still a long way from achieving the

they use their cars. By installing a box in the car that deter-

vision outlined in the original paper. The main problems still

mines how many times and at what times the car is driven, the

remain: the inflexibilities introduced into the system by regu-

insurance company can work out the appropriate premium.

lation, corporate restrictions, and of course human behavior. It

Norwich Union, the U.K.-based insurance company, launched

will take a long time before the degree of transparency and

this scheme to help younger drivers reduce their insurance

regulatory liberation will be at a level that allows many of the

premiums. As a bonus, they offer clients the first 100 off-peak

predictions in the original paper to come to fruition. And once

miles each month under the policy for free. Now if clients that

that is achieved, we still have to overcome our natural instinct

drove less than a 100 miles in a month, say due to summer hol-

of utilizing only that which we are already comfortable with.

idays abroad, were able to pass on their credits to others, a market could be created for exchanging these free miles.

Even within the highly automated financial services industry, a large proportion of financial transactions involve person-to-

The second development, although still in its infancy, is the

person negotiations, despite the availability of highly capable

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and user-friendly tools. It is, after all, still an industry based fundamentally on trust and security. However, the new gener-

Appendix

ation of technology-savvy individuals will further push bound-

New asset classes

aries and help realize the dream outlined in the original paper.

Conclusion The new medium of exchange will, over time, allow for the release of value from both recognized and unrecognized assets possessed by private individuals. The magnitude of value liberation from eliminating many of the inefficiencies that exist within the current financial system is becoming clearer. By consolidating the banking industry and improving the efficiency of the major national exchanges, the cost of funding and undertaking financial transactions will fall dramatically, resulting in substantial value release. Furthermore, through

It is with respect to these types of assets that the impact of the new wave of liquidity is most profound. These assets fall into the categories of being either unrecognized or one in which the potential to release value has been overlooked. The new wave of liquidity can help release the value of these types of unrecognized assets by allowing for both securitization and efficient disposal. Given the profundity of this impact for these types of assets, we would like to spend some time discussing each asset category: ■ Human capital — Within the new wave of liquidity, people would be able to

supply their services to anyone who needs them anywhere in the world. The extreme form of this value release would take the form of short-term, even hourly, supply of services through virtual networks. These opportunities exist both for those who are in full employment or those willing to supply their services on ad-hoc basis to whoever would pay the highest price for that service. To get the highest price, the providers of these services would auction their time and have those who demand it bid for it within a highly efficient market place. The advancement that will take place within the communication mediums would mean that the supplier and user of this service could be in different parts of the world.

the use of outsourced managed services, including ASPs and BSPs, the cost of settlement and clearing these transactions will fall, resulting in a further value release across the economy. Once the optimal level of efficiency necessary for the financial markets is achieved, we will enter a new era. An era in which private individuals can use these types of infrastructures to price and transact their recognized and unrecognized assets, or their revenue potential, through the process of asset securitization. The result will be a dramatic increase in global liquidity. However, an important question remains: ‘What would markets do with so much increased liquidity?’ That will be the focus of our follow-up study of the new wave of liquidity.

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The risk that buyers of these services face is the same as those who purchase goods and services across national borders. The ability to determine the true capabilities of the person supplying the service will be improved as all the necessary information about current and previous jobs undertaken by the service provider is available to all who participate in this auction. In simple terms, this would be a marriage of a global services database and the current due diligence based model powered by e-Bay. ■ Ideas — The greatest asset of any human being is his/her ideas. In tomorrow’s

world the need for labor intensive works would be significantly diminished as automation and artificial intelligence undertake more and more of these types of jobs. The focus will, therefore, shift from the back-end to the front-end. People can distinguish themselves based on the quality of ideas and creativity they have. There would be businesses established around the exchange of ideas, such as ideaexchange.com. Great thinkers would even be able to securitize the future value of ideas that they are expected to have. Perhaps this also explains why some corporate boards contend that a portion of the compensation of chairmen and chief executives (Bill Gates immediately comes to mind) should be based on their ability to generate ‘vision’ and ideas for their companies, beyond shouldering responsibility for current revenue and operational results. ■ Bandwidth / excess capacity — The provision of excess capacity is slowly taking place within some markets. For example, Enron’s broadband services used to allow companies to sell excess capacities of their networks to other users. The same could be done for factories and other types of services, such as airlines (priceline.com) and other mass transit services, ISPs (bandx.com), ASPs, BSPs, and many others. ■ Content — Individuals should also be able to provide content to those who need it through an ASP. This allows for the release of value from those contents that are proprietary and have value to other people. The open source


■

■

■

■

■

■

■

■

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platform Linux was created on this fundamental notion (and also to challenge Microsoft head on). Time — This could be personal or corporate time that is sold through the global exchanges. For example, an individual could sell six months of his or her time to a corporation in two years’ time. The revenue that can be obtained from that can be securitized so that its value can be released today. Future earnings — Individuals and corporations should be able to release the value tied within their future earnings potentials. Myrichuncle.com, for example, allows investors to share in future revenue potential of students by investing in them, rather than lend them money, as has been the norm for many years. Potential credit capacity — Most people have a certain credit limit that they are allowed to use. If you are unable to use the whole amount available to you, you can supply it to those who would have better use for that credit capacity. In this way, you can earn a margin on your superior credit quality. Info about transaction behavior — This type of information can be very useful in determining the kinds of offerings an organization needs to focus on, since they would know what goods or services need to be available all the time and which can be supplied at a later time. Information about personal characteristics — Information concerning individual traits can also be used to supply them certain services, such as travel insurance, based on real time. Individuals would be able to insure themselves not on annual basis but each time they use travel. For example, information about the current weather or security conditions combined with the typical driving habits of a driver can be used to price their insurance policy for that defined period. The individual can subsequently either hedge against the change in weather conditions or opt to buy the cheaper option and pay more should the weather change during his/her trip. In either case, the individual would only pay for insurance when they use it. This would release the value typically tied down in purchasing annual memberships. Points — Currently it is very hard to release the value of points that you receive from your credit card providers, airlines, and other frequent usage points providers. Within the new wave of liquidity, these points can be easily standardized across industries and competitors, and subsequently exchanged on the open market. Collectibles — These can be pretty much anything that people would be willing to pay for. For example, customers could sell Coke cans and cigarette boxes to those who would like to collect or reuse them. eBay is the first successful platform to determine the latest market price and release value from these types of assets. Personal float management — Similar to many corporations, individuals will be able to aggregate all their assets and invest them overnight at the highest possible rate. The next day, these assets will be returned to their respective sources for utilization. Scarce resources — In the future individuals will be allocated scarce resources such as health club memberships or time on specific transportation mediums, such as planes, highways, and trains. Individuals who do not need a specific allocation can sell their slots. The future revenues that can be generated from selling your slots can be securitized and sold. In this way, individuals would be able to release the value tied within the limited resources allocated to them.

This appendix should help illuminate the true potential of the paradigm shift that we are observing. The ability and technology to release value from almost all types of assets is currently at the disposal of most individuals. These assets clearly have values that need to be released. However, what is lacking is the level of comfort, security and standardization required to release these asset values. What the new wave of liquidity does is to provide the platform for exchanges of these assets so that either ownership or usage is transferred to those who have the highest valued use for them. It expands the ability of all individuals to not only provide and receive services that are currently reserved for only the largest of corporations, but also to release values from assets that were previously not even considered as assets. That is the true potential of this new wave of liquidity.

Assets Tangible Cash Land & property Cars Jewelry Home furnishings Art pieces (non-collectible) Intangible Investments Pensions Home insurance Social security payments

Liabilities

Personal loans Credit cards Mortgage Pending lawsuit Medical liability Family Children Elderly Home Car maintenance Tax Utilities Insurance

New asset classes Human capital Ideas Bank width/excess capacity Content Time Future earnings Potential credit points Collectibles Holidays Medical benefit Reservations Concerts Travel Restaurants School places Figure 3

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