Friday, August 7, 2009

Sipping From a Fire Hose

In our last post, on the subject of the size of the potential TRE opportunity, we concluded:

“TRE certainly won't reach its potential overnight. It will take some years. It will probably also take some changes in rules, format and process.”

As I re-read that statement it actually sounds a little weak. Let me make it a little stronger.

I truly believe the TRE concept to be brilliant. And no one I’ve spoken with about it disagrees, at least in principal. The question usually becomes: does the current implementation effort allow the potential to be achieved?

And the answer has to be: NO!

Of course it doesn’t. But, then again, how could it?

In the last post we worked backward from the national income accounts to the potential market size. The view was from 30,000 feet, or from the moon, depending on your level of skepticism.

Now, let’s look at it from a different vantage point.

TRE reports that its average auction size is currently about $65,000. The average number of auctions per day is a statistic that I don’t think I’m allowed to divulge. But let’s look at what is required to meet the market potential we discussed in the last post.

For TRE to achieve an annual gross volume of $450 billion, which would keep about $50 billion of capital employed, it would take nearly 7 million transactions per year at the current average size. That equals about 27,500 transactions per business day. The total number of auctions completed since TRE's inception is only a few percent of that required daily figure!

A buyer trying to deal with that kind of volume would be sipping from a fire hose! The velocity of offerings would quickly overwhelm him. But the current system would not allow that many transactions to even REACH him.

Let’s take a step back.

TRE estimates it will generate about $1 billion in gross volume next year. At the current average auction size that would suggest a total of about 15 thousand transactions for the year. That would equate to about 60 per business day.

That would probably require some re-working of the current platform, and it’s probably a stretch, but at this stage of the process the exchange HAS to stretch; certainly in setting goals for itself.

It’s easy to look at big numbers and decide that something can’t be done. It’s better, if you believe in an opportunity, to try to figure out how the problems can be solved.

There’s no question that huge changes would have to be made to the current system to accommodate anything like the volume we wrote about in the last post. But huge changes were required to go from the Sony Walkman to the Apple Ipod!

It wasn’t that long ago that we thought it was a marvel to be able to carry an entire hour of music on a device that clipped onto our belt. Now we can carry hundreds (maybe thousands) of hours of music on a device that is hardly noticeable in a shirt pocket!

The question is not whether we can sip from a fire hose.

The question is: how can we control the flow of water from the hose in such a way as to allow us to take a sip!

One mindset assumes failure; the other assumes success given a sufficiently powerful incentive.

Water is a powerful incentive to the thirsty!

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