BEWARE OF GAME-PLAYING IN ONLINE MARKETS
by John S. McCright, eWEEK

As the e-marketplaces aggregate supply and demand, they also aggregate the information that makes it possible to play games on a grand scale.

We shouldn't be surprised if, over the next few years as higher volumes of trading move online, some industries are beset by trading scams that result in the downfall of major names and the disruption, albeit temporary, of at least one major industry. Such calamities will be directly attributable to online gaming.

I'm not talking about people playing Dungeons and Dragons online. The games I'm referring to are the kind of high-stakes gambles that have been the domain of Wall Street. What will move this gaming into the corporations themselves is the massive amount of real-time data being collected and made available in online marketplaces.

An example of gaming might be when a supplier sees an opportunity to sell goods at a high price and so offers for sale a higher quantity of that good than it has in stock. The assumption the supplier makes is that it can either buy the excess goods at a lower price later when it is time to ship them or can convince the buyer to take shipment later since it has already gone through the hassle of setting up the deal.

Some buyers, too, will play the market, perhaps by buying up the supply of a key component so that competitors will be stuck without the parts or be forced to come to them to buy the component.

It is basic economics: Fluctuations in supply and demand move prices and create opportunity for profit. Before much of a given industry's trading goes online, there is not as much opportunity for this kind of gaming. It takes a lot of time and money to gather the information to make the process worthwhile. Only a few commodities brokers can make a living at it.

But with the inevitable rise of online marketplaces, information on trading in a large segment of a given industry -- maybe even most of an industry -- will be just a few mouse clicks away.

It will be dangerous, just like risking this month's paycheck or the family house in a Las Vegas casino is dangerous. Usually, someone gets hurt -- and it's not the casino.

Gaming is certainly not a new concept in business. I can't count the number of CEOs and chief financial officers who have taken a fall because they gambled by fudging their revenue recognition or outright fabricating their books in the hope of avoiding detection once the market for their product turned around and sales ballooned to match their bogus forecasts.

But the risk will become greater as electronic supply chains become ingrained in the way we do business. As just-in-time production filters through to every components manufacturer in a supply chain, inventories will fall, and the opportunities for gaming will rise. The risk, of course, is that as the buffer of available components falls, one spike in demand coupled with deceptive supply information created through a supplier's gambit could leave the production lines idle through much of a given industry.

Market gaming, although not necessarily restricted to online markets, can be seen in the California electric power industry. Aside from the claims that power supplies simply aren't there, several groups have reported that power suppliers have squeezed buyers by withholding electricity or committing to deliver more than they could actually produce or buy.

Surely no C-level executive would gamble away his or her entire company through marketplace gaming, you say. But it isn't always a top exec who ruins a company and shakes the confidence of an industry. Do you remember a company called the Bank of Credit and Commerce International? This 100-year-old British trading and finance company was bankrupted a few years back when a rogue trader made some bets on foreign currency trading that went disastrously wrong.

You may make the argument that the trader's bosses should have had better controls in place to make sure such trading didn't take place. But if a staid, old industry like banking doesn't have such controls in place, what are the chances that many companies involved in the get-rich-quick atmosphere of e-commerce will have the forethought to put such controls in place from the outset?