Can Prices Be Property?

Jim OverdahlChief EconomistU.S. Commodity Futures Trading Commission

Presentation to the

Technical Advisory Committee

April 28, 2005

Disclaimer: The views expressed in this presentation are of the presenter only and d

necessarily reflect the views of the CFTC or its staff.
Outline

•A brief historical review of intellectual property disputes involving prices.•A brief review of the scholarship related to the subject.•A review of some policy issues posed by intellecproperty disputes over prices.
 Medieval fairs.

 19th century stock exchanges. 19th century futures exchanges. Consolidated tape and the NMS. (1970s) Government bond market. (1990s). Municipal bond market. (1990s) Settlement prices for CME back-month Eur

contracts. (1994).

Disputes Over the Owners

of Prices Are Not New:
 The CBOT faced new trading technology: 

telegraph, i.e., “The Victorian Internet,” thprice quotations more valuable.

 The telegraph facilitated off-exchange trad

used exchange-generated price quotations contributing to the price discovery process exchange. 

 Courts ordered the CBOT to furnish quotes 

on the same basis, or none.

The 19th Century CBOT a

the Establishment of Prope

Rights to Price Quotation
 The “Baker Blackout.” The telegraph oper

were tossed out and the windows of the ehall were soaped to prevent transmission quotes to outsiders via hand signals. This of (literally) opaque markets lasted for 20 

The 19th Century CBOT a

the Establishment of Prope

Rights to Price Quotation
 In 1905 the U.S. Supreme Court held in Ch

that the CBOT could protect their price qufrom unauthorized use.

“The [CBOT’s] collection of quotations 

entitled to the protection of law. It stan

trade secret.”

The 19th Century CBOT a

the Establishment of Prope

Rights to Price Quotation

Review of Scholarship on 

Intellectual Property Issu

Related to Prices

The role of property rights in facilitating marktransactions has been studied by both econoand legal scholars:

 Ronald Coase, The Firm, The Market, and 

(1988); “The Institutional Structure of Production,” American Economic Review, 1

 Yorem Barzel, Economic Analysis of Prope

Rights, (1989).

 Armen Alchian, Harold Demsetz, Douglas N

Richard Posner and many others.
Review of Scholarship on 

Intellectual Property Issu

Related to Prices

There is a small body of literature related sp

to property rights and prices:

 Mulherin, Netter, and Overdahl. Brown-Hruska and Ellig. Webb.  Price transparency literature (e.g., Mulher Economics of information literature (e.g., S Evolution of the law literature (e.g., Epste
Review of Scholarship on 

Intellectual Property Issu

Related to Prices

Prices do not spontaneously appear. High-quprices are the result of a production process involves considerable investment and expensExchanges are firms that produce prices. Excexist because they provide an efficient means economize on the transaction costs associatetrading.
The Ability of Exchanges 

Establish and Enforce Prop

Rights to Real-Time Prices 

Quotes...

Solved the externality problem associated witproduction faced by exchanges, permitting exchanges to perform their cost-reducing role trading process.Helped improve the quality of prices discoverthe exchange.
Review of Scholarship on 

Intellectual Property Issu

Related to Prices

Technical innovation can compromise existing contractual relationships by introducing new opportunities unforeseen at the time the contwere written.Innovation in trading technology can make pmore valuable and worth fighting over, e.g., telegraph, the telephone, the ticker, the interelectronic trading platforms, the rise of dealemarkets. 
Policy Issues Posed by 

Intellectual Property Dispu

Related to Prices

Property restrictions vs. monopoly restrictionsMarket transparency issues.Do exchange-generated prices fit the definitiopublic good?Efficiency vs. wealth transfers.
Property Restrictions vs

Monopoly Restrictions.

Property rights can exclude and restrict. So cmonopolistic restrictions. How do we tell the difference?
Market Transparency Issu

Will the invisible hand produce transparent mThat is, do sufficient incentives exist for orgaexchanges to produce transparent markets? price?Mandated transparency. SEC-style vs. CFTC-stransparency requirements.Publication of market data vs. control of use. Information producers vs. information consumMandated price transparency can raise the cotrading in a transparent market existing side-with an opaque market.
Are Prices a Public Good

Nonrivalrous consumption criterion. Is the ma

cost of an additional person using a price, onproduced, zero?

 Probably.

Nonexcludability criterion. Can prices be with

from one party only by withholding them from 

 No. History shows that exchanges have th

to restrict the use of prices.

Is contracting for the use of prices prohibitiveexpensive?

 No. There is a thriving market for price 

information through data vendors and othprivate contracts.

 Fuzzy property rights can raise the cost of 

contracting.
Efficiency vs. Wealth Trans

In considering policies that affect the strengtcertainty of property rights over price informapolicy makers need to distinguish between efeffects (effects that on average make everyobetter off) and wealth transfer effects (effectbenefit one group at the expense of another)