Sunday, August 16, 2009

It's Trivial, Really!

My brother is a professor of computer science and electrical engineering. He has an annoying habit of conversation that I suspect is common among those who deal in theory more than practice.

We might be talking about an issue that seems to me to be quite complex and in need of clarification before moving forward in the conversation. And he, (seemingly) oblivious of my need to understand, will say “it’s trivial, really” and just move on to the next step, leaving me behind.

It still annoys me but now at least I understand.

He just means that all of the information or the tools necessary to move from that step in the analysis to the next one are already known or in hand.

No matter how complex the transition might be, if the necessary math is known or the process or engineering problems have already been solved, then it isn’t necessary for the academic to spend any time discussing them.

What is important is the next UNSOLVED problem; everything else from his point of view is “trivial”.

In our last post: “Sipping From a Fire Hose” we calculated that it would take about 27,500 transactions per day at the current average deal size to keep $50 billion employed in TRE transactions. I got an email from a reader expressing some skepticism that a deal flow of that magnitude could be managed.

I suggest that managing the deal flow is actually not the issue. In the words of my brother: It’s Trivial, Really!

Consider this: there is commercially available and affordable software that has the capacity to continuously screen the activity of tens of thousands of stocks, bonds, futures, and options positions, and to alert an investor to situations that meet highly complex predefined analysis criteria.

Screens that search for combinations of precisely-defined fundamental metrics in combination with selected technical analytics and real-time inter-market pricing anomalies can be run using these tools on a $1,000 laptop wirelessly connected to a data source at poolside.

There is nothing more theoretically complicated in providing TRE buyers the ability to precisely define the transactions they want to look at and to ignore all the rest.

Four things are needed to reach the calculated volume numbers we quoted in our last post:

1. More Buyers,

2. More Sellers,

3. An increase in the number of searchable criteria provided by TRE, and

4. Software upgrades sufficient to allow Buyers to search for the deals they are interested in and, potentially, to manage bidding strategies.

Managing the deal flow requires both the increase in searchable criteria and the software improvements.

The software part really IS trivial. Those problems have been solved. The adaptation by TRE is simply a matter of resource allocation.

The issue of establishing searchable criteria is more challenging.

The information currently provided on the TRE platform that the exchange actually COULD make searchable is not adequate to narrow down a very large deal flow. TRE could currently allow buyers to search by industry, by size, by transaction history, by number and character of Account Debtors, by a few of the most recent financial statement entries, etc.

A dozen meaningful criteria might be actually possible to search on now. (They aren’t searchable now, but they could be.) That’s too few to support the potential volume of transactions.

A screen that gives me a thousand options is of little help in a real-time auction situation unless I can also design automated bidding strategies. But actually the technology for that is also currently available! Adaptation to TRE needs in that regard would also be “trivial”.

In fact, when you really get down to it, if the estimates of potential market size are anything close to correct—all of the technological and information-management issues are actually trivial.

Not that they are easy. Not that solving them would be without complication or challenge. But the technical problems of managing the potential deal flow have already been solved.

It's not MANAGING the deal flow that we need to be concerned about--it's GETTING it!

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