Consistently following the advice to “Buy cheap, sell dear” requires that you know something the market doesn’t. Consider a very simple example. Two towns one has abundant amounts of oysters, so abundant that the local population is sick of them; meanwhile in the second town oysters are a delicacy. A trader can make a good living moving oysters between the two; but only so long as he can keep his sources secret. The lack of transparency enables the profit; or more generally the information asymmetries between the two towns.

I was very amused by a story that appears in the early pages of Frank Partnoy’s book Infectious Greed. In this story a trader discovered way to trade between two markets; rather than moving oysters he moved information. The markets were currency markets; a private market and a public market. So in one market his actions were visible, i.e. they generated information, while in the second market they were largely invisible.

While all commerce, markets, etc. are, to a degree, about risk it’s particularly helpful at this point to introduce a point about betting. If you wish to place a $100 bet on your home team there are an infinite number of ways you might do that. For example you might place a $300 dollar bet on the home team and a compensating $200 bet on the opposing team. That may seem like an odd choice but notice that it allows you, with nearly total honesty, to go around telling everybody you bet $200 dollars on the opposing team. It lets you signal the opposite of your true intentions. That creates an information asymmetry, one that you control.

The public/private markets enable the same pattern. If you can trade in both a public and a private market for the same good; but only one of these trades will generate an signal about your intentions. If your trades are large enough you can move the market with that signal.

In the story the trader played this game with the international currency markets. He actually had two pairs of markets he could play this game in. First he had the traditional currency market and the currency options markets which were at that time not well connected. Secondly he had public exchanges and private, so called over the counter, deals he could make. There is a short paragraph in the midst of the story about how his boss got a call from New Zealand’s central banker demanding that he stop toying with their currency.

Because benefits can flow to market actors from information asymmetries most commercial dialog is permeated by a subtext of information hoarding. In some scenarios, like the one above, the appearance of an abundance of information might be a signal that information is scarce in an adjacent market. I think this is a rarely realized element of why open source appears so suspicious to some commercial observers.