Masood Mortazavi's Weblog

Wednesday January 10, 2007

[ Technology ] Patents on Financial Instruments

Many investment banks have filed U.S. patents on concepts for financial instruments, these patents have been filed on a vareity of instruments from derivatives to Islamic asset-based investments. Apparently such financial patents are not granted in Europe. It may be clear to some that if an instrument has a great market power, its exclusive availability to one firm can lead to particular instabilities when combined with unavailability to other firms of counter-instrument sor balancing instruments or instruments that "bet" in the same direction. This is a hypothesis worth studying but I think the investigation would be quite subtle and only simple cases can be modeled. Even so, the study of such cases can be illuminating. Economnic efficiency models suppose multiple actors capable of taking parallel actions to make corrections to market swings. Perhaps that story was simply what it was: a simple fiction.

2007-01-10 19:53:22.0 -- Comments [2] ; Permalink ; Trackback.
capital finance patents

Comments:

Why would anyone want to trade instruments with a monopolist underwriter?! That seems like insanity. OTOH, that seems like a natural constraint on the value of financial instrument patents. Also, keep in mind that innovation in financial instruments in the past 30 years has probably had a lot to do with facilitating economic growth; it would be bad if the new patents have negative impact on the economy (but see above).

Posted by Nico on January 11, 2007 at 12:24 PM PST #

You make a very good point about some very relevant issues. Yes, the monopoly nature does reduce the buyers' power. So, most underwritings are "unique," and the offering bank has a "monopoly." However, since underwritings occur in parallel w/ negotiations with buyers, the buyer still has other types of investment available. So, in a sense there's still competition, and the underwriter knows this, too. Hence, the ongoing negotiations during the underwriting process among buyers and seller. The patent becomes another "brand"-ing and marketing ploy for the instrument. So, "No one else has this product," may be a great selling point for the buyer...

The effect on economic growth and stability could be more subtle. It will stifle growth to the extent people cannot use financial instrument concepts to create new ones or balancing concepts.

Posted by M. Mortazavi on January 11, 2007 at 07:39 PM PST #