《中国金融市场 Chinese Financial Markets》补充阅读文献：the impact of the internet on financial markets

By Nicholas Economides Professor of Economics, Stern School of Business New York University, and Visiting Professor, Stanford University The impact of the Internet on financial markets The editor asked to me write a short paper for the inaugu Definit ral issue of the journal. I thought that it would be most fitting The Internet is a multi-purpose, multi-point digital interac- to write on the truly fundamental transformation of financial tive worldwide telecommunications network. By its nature, the markets brought by the most important network of the last Internet facilitates multi-point information flows and all the fifty years, the Interne processes that are based on information flows Financial inter- mediation and financial exchanges are based on the exchange Technology always had an impact on financial markets. of information. In fact, at present, a transaction of exchange Often, as in the case of the telegraph, it was th of any financial instruments, including cash, equities, bonds, technology in the financial realm that necessitated the instal- and their derivatives, is just a recording of altered digital infor- lation of the new network. Moreover, frequently, the introduc- tion of new technology had tremendous and sometimes unex- pected effects on the structure of financial markets For exam- Direct impact Of The Internet ple, many historians explain the eventual primacy of the New The impact of the Internet on financial markets is multi York Stock Exchange over the Philadelphia Stock Exchange on faceted and profound. One sees immediately that, first, the the liquidity New York attracted from orders collected over Internet facilitates information flows. this includes (i info the telegraph. In the absence of the telegraph, both mation used to evaluate actions, such as analysts report exchanges could survive as equals. But once the telegraph and (ii software and interfaces that facilitate information was installed, it led to the supremacy of one of exchange, dissemination, and evaluation. Second, the Internet nother example, in recent years, nother facilitates interaction among economic agents. This includes change, the availability of mathematical formulas for the pric. (i) the exchange of financial instruments and physical com- ing of options, spurred the mushrooming of the derivatives modities, as well as of contingent claims on these; ( ii)the cre- markets. Thus, a new global network is expected to have an ation and enhancement of markets; and (iii) multi party live impact on financial markets. In fact, the Internet, now in its discussion of financial markets. Third, the Internet facilitates eighth year as a commercial network, already has had an more direct access of economic agents to markets. And, since impact, and is expected to have a truly transforming influence the Internet is truly a global network, all of the above can be on financial markets as it matures done across national borders, as well as state and local juris

The editor asked to me write a short paper for the inaugu￾ral issue of the journal. I thought that it would be most fitting to write on the truly fundamental transformation of financial markets brought by the most important network of the last fifty years, the Internet. Technology always had an impact on financial markets. Often, as in the case of the telegraph, it was the use of new technology in the financial realm that necessitated the instal￾lation of the new network. Moreover, frequently, the introduc￾tion of new technology had tremendous and sometimes unex￾pected effects on the structure of financial markets. For exam￾ple, many historians explain the eventual primacy of the New York Stock Exchange over the Philadelphia Stock Exchange on the liquidity New York attracted from orders collected over the telegraph. In the absence of the telegraph, both exchanges could survive as equals. But once the telegraph was installed, it led to the supremacy of one of the two. In another example, in recent years, another technological change, the availability of mathematical formulas for the pric￾ing of options, spurred the mushrooming of the derivatives markets. Thus, a new global network is expected to have an impact on financial markets. In fact, the Internet, now in its eighth year as a commercial network, already has had an impact, and is expected to have a truly transforming influence on financial markets as it matures. Definitions The Internet is a multi-purpose, multi-point digital interac￾tive worldwide telecommunications network. By its nature, the Internet facilitates multi-point information flows and all the processes that are based on information flows. Financial inter￾mediation and financial exchanges are based on the exchange of information. In fact, at present, a transaction of exchange of any financial instruments, including cash, equities, bonds, and their derivatives, is just a recording of altered digital infor￾mation. Direct impact Of The Internet The impact of the Internet on financial markets is multi￾faceted and profound. One sees immediately that, first, the Internet facilitates information flows. This includes (i) infor￾mation used to evaluate actions, such as analyst’s reports; and (ii) software and interfaces that facilitate information exchange, dissemination, and evaluation. Second, the Internet facilitates interaction among economic agents. This includes (i) the exchange of financial instruments and physical com￾modities, as well as of contingent claims on these; (ii) the cre￾ation and enhancement of markets; and (iii) multi-party live discussion of financial markets. Third, the Internet facilitates more direct access of economic agents to markets. And, since the Internet is truly a global network, all of the above can be done across national borders, as well as state and local juris￾dictions. 8 The impact of the Internet on financial markets By Nicholas Economides Professor of Economics, Stern School of Business, New York University, and Visiting Professor, Stanford University

The Impact of the Internet on financial markets The Internet's impact as an enhancement large variety of items ranging from printed information to of existing processes general software goods to music, pictures, video, and movies Many, if not most, of the effects of the Internet are enhance- in digitized form. ments of existing processes and markets. However, even for those, often the extent of improvement can be so significant Such delivery can be faster, more efficient, and cheaper as to have profound consequences for market structure. A than traditional distribution. Moreover, content in digitized typical example of an improvement of an existing process is form is searchable for words and patterns, so it is arguably of the elimination of the middleman(broker) in sending orders to enhanced value. An interesting example of distribution of financial markets. Before the Internet, this was possible by ital goods on the Internet is Napster. By leveraging the dual using the telephone. But the Internet allows it to be done nature of computers as clients and servers, as well as the geo- much more efficiently through a direct connection to an elec- metric expansion of network effects, Napster tronic system. And, the Internet brings a wide availability of extremely successful in facilitating peer-to-peer transfers information both about current prices and past performance music among computer users. Irrespective of the legality of as well as various tools to analyze it. the transfers it is evident that distribution of music over the Internet can be very efficient and may, over time, replace tra. ditional distribution methods process Tools that were available only in trading rooms now are very widely available. To the shrewd and wise trader, these Another example of an interaction that is made possible by are very valuable and level the playing field. For the foolish or the Internet is multi-party, text-based chat functionality with the informed- but not-knowledgeable trader, the Internet the possible combination of interactive drawing and speaking makes it easier to lose money. Overall, it is worth noting that The creation of communities based on common interests and he wide availability of rapid action trading technology has the possibility of rapid interaction among members of the increased market volatility. ommunity worldwide is a profound social and political change brought on by the Internet, although at this point its In another interesting example of a drastic enhancement of effect on financial markets is uncertai an existing process, the Internet has created tremendous pressure on eliminating price discrimination based on geogra- The Internet as a facilitator of a winner- phy or national borders, as well as in increasing price compe- takes-most world tition among providers of standardized goods. Toll-free calling The Internet like most networks, tends to create a"winner and mail order had already created such pressures. But the takes. most" world where one firm has a lion 's share of the Internet's ability to allow for the collection of pricing informa- activity in a market. A market structure of small, but equal. tion from dozens of sellers reduces search costs immensely. firms or small, but equal, market exchanges is less likely to intensifies price competition among different providers, and survive in a post-Internet world. Small advantages tend to be all but eliminates geographically-based price discrimination magnified and to become more prominent as the Internet by the same provider. smoothes out flows and removes frictions that used to sup- port early egalitarian market structures. The Internet's impact as a creator processes and interactions Markets with network effects lead to a The Internet also creates processes, goods, and interaction winner-takes-most world that were not possible before. For example, digital goods can A market exhibits network effects(or network externalities) be delivered over the Internet Digital goods when the value to a buyer of an extra unit is higher when more

The Internet’s impact as an enhancement of existing processes Many, if not most, of the effects of the Internet are enhance￾ments of existing processes and markets. However, even for those, often the extent of improvement can be so significant as to have profound consequences for market structure. A typical example of an improvement of an existing process is the elimination of the middleman (broker) in sending orders to financial markets. Before the Internet, this was possible by using the telephone. But the Internet allows it to be done much more efficiently through a direct connection to an elec￾tronic system. And, the Internet brings a wide availability of information both about current prices and past performance as well as various tools to analyze it. This has been called the “democratization of trading process.” Tools that were available only in trading rooms now are very widely available. To the shrewd and wise trader, these are very valuable and level the playing field. For the foolish or the informed- but not-knowledgeable trader, the Internet makes it easier to lose money. Overall, it is worth noting that the wide availability of rapid action trading technology has increased market volatility. In another interesting example of a drastic enhancement of an existing process, the Internet has created tremendous pressure on eliminating price discrimination based on geogra￾phy or national borders, as well as in increasing price compe￾tition among providers of standardized goods. Toll-free calling and mail order had already created such pressures. But the Internet’s ability to allow for the collection of pricing informa￾tion from dozens of sellers reduces search costs immensely, intensifies price competition among different providers, and all but eliminates geographically-based price discrimination by the same provider. The Internet’s impact as a creator of new processes and interactions The Internet also creates processes, goods, and interaction that were not possible before. For example, digital goods can be delivered over the Internet. Digital goods encompass a large variety of items ranging from printed information to general software goods to music, pictures, video, and movies in digitized form. Such delivery can be faster, more efficient, and cheaper than traditional distribution. Moreover, content in digitized form is searchable for words and patterns, so it is arguably of enhanced value. An interesting example of distribution of dig￾ital goods on the Internet is Napster. By leveraging the dual nature of computers as clients and servers, as well as the geo￾metric expansion of network effects, Napster has been extremely successful in facilitating peer-to-peer transfers of music among computer users. Irrespective of the legality of the transfers, it is evident that distribution of music over the Internet can be very efficient and may, over time, replace tra￾ditional distribution methods. Another example of an interaction that is made possible by the Internet is multi-party, text-based chat functionality with the possible combination of interactive drawing and speaking. The creation of communities based on common interests and the possibility of rapid interaction among members of the community worldwide is a profound social and political change brought on by the Internet, although at this point its effect on financial markets is uncertain. The Internet as a facilitator of a “winner￾takes-most” world The Internet, like most networks, tends to create a “winner￾takes-most” world, where one firm has a lion’s share of the activity in a market. A market structure of small, but equal, firms or small, but equal, market exchanges is less likely to survive in a post-Internet world. Small advantages tend to be magnified and to become more prominent as the Internet smoothes out flows and removes frictions that used to sup￾port early egalitarian market structures. Markets with network effects lead to a “winner-takes-most” world A market exhibits network effects (or network externalities) when the value to a buyer of an extra unit is higher when more The Impact of the Internet on financial markets 9

The mpact or the nternet on rinancial marke units are sold, everything else being equal. In a traditional net- size and profitability of exchanges and firms affected by mar- work such as the Internet, network externalities arise because ket liquidity considerations as discussed above. Moreover, con a typical subscriber can reach more subscribers in a larger sumers are willing to pay more for the high liquidity exchange network Therefore, its profits can be a large multiple of profits of other exchanges. Similar inequality arising out of network external- In a virtual network, network externalities arise because es occurs in many other products and services. larger sales of component a induce larger availability of com plementary components B1,. Bn, thereby increasing the Intensification of competitio value of component A. The increased value of component A In network markets, the addition of new competitors, say results in further positive feedback. under conditions of free entry, does not change the market structure in any significant way once few firms are in opera. For example, the existence of an abundance of windows. tion. The addition of a fourth competitor to a triopoly hardly compatible applications increases the value of windows. In a changes the market shares, prices, and profits of the three top financial exchange market, the abundance of orders on both competitors. This is true even under conditions of free entry sides of the market, that is, the" thickness"or high liquidity of the market, decreases the variance of expected price and However, the fact that the natural equilibrium in network increases the payoff of traders. In turn, this brings extra liq- industries is winner-take-most with very significant market idity to the market resulting in increasing volume inequality inequality does not imply that competition is weak. To the con- among financial exchanges. trary, the competition race on which firm will create the top platform or be the top exchange, and reap most of the bene- Economic theory and empirical observation have shown fits is, in fact, very intense. moreover, the network also has an at markets with strong network effects, such as financial expansionary effect as it typically makes it easier and cheap. exchange markets and many others facilitated by the Internet, er to buy the good or service. Thus, the size of the market also are"winner-take-most"markets when the product offerings expands of firms are differentiated. that is in these markets there is extreme market share and profits inequality. The market In a way, it may seem paradoxical that there is intensifica- share of the largest firm can easily be a multiple of the mar- tion of competition combined with increasing market concen- ket share of the second largest. The second largest firm's tration, since that is not possible in non-network markets. But market share can be a multiple of the market share of the in network markets, and markets facilitated by the Internet, third, and so on. This geometric sequence of market shares intensification of competition goes hand-in-hand with increas implies that, even for a small number n, the nth firms market ing market concentration. share is tiny. Under intense competition, small competitors are forced to The Internet's impact on the liquidity of innovate to avoid being completely squeezed out of the mar- financial, business-to-business, and busi- ket. In a very interesting example, radically breaking with tra. ness-to-consumer exchanges dition the island ecn decided to open its limit order book to As a direct consequence of network externalities, high liq. the public so that it can attract more liquidity. Traditionally the uidity of a financial or other exchange increases the value of limit order book was held close to the vest of the specialist or transactions in that exchange, brings in more orders, and fur. the exchange. So far, opening the limit order book to the pub- ther increases liquidity. This leads to the extreme inequality of lic has been successful for Island, but it has not prompted the same action by larger competitors. 1 For a detailed discussion of these issues see Economides (1996) 2 See Economides (1993), (1994). Economides and schwartz(1995) 4 Due to the natural extreme inequality t shares and profits in such markets at any point in time, there should be no presumption that there were nti-competitive actions that were responsible for the creation of the market share inequality or the very high profitability of a top firm. Great inequality in sales and profits is the natural equilibrium in markets with network externalities and incompatible technical standards. No anti-competitive acts are neces- 5 See Economides and Flyer (1998). Table 1, taken from this paper, shows market coverage and prices as the number of firms with incompatible platforms increases Maximum potential sales was normalized to 1

units are sold, everything else being equal. In a traditional net￾work such as the Internet, network externalities arise because a typical subscriber can reach more subscribers in a larger network. In a virtual network, network externalities arise because larger sales of component A induce larger availability of com￾plementary components B1, ..., Bn, thereby increasing the value of component A.1 The increased value of component A results in further positive feedback. For example, the existence of an abundance of Windows￾compatible applications increases the value of Windows. In a financial exchange market, the abundance of orders on both sides of the market, that is, the “thickness” or high liquidity of the market, decreases the variance of expected price and increases the payoff of traders. In turn, this brings extra liq￾uidity to the market resulting in increasing volume inequality among financial exchanges.2 Economic theory and empirical observation have shown that markets with strong network effects, such as financial exchange markets and many others facilitated by the Internet, are “winner-take-most” markets when the product offerings of firms are differentiated.3 That is, in these markets, there is extreme market share and profits inequality. The market share of the largest firm can easily be a multiple of the mar￾ket share of the second largest. The second largest firm’s market share can be a multiple of the market share of the third, and so on. This geometric sequence of market shares implies that, even for a small number n, the nth firm’s market share is tiny.4 The Internet’s impact on the liquidity of financial, business-to-business, and busi￾ness-to-consumer exchanges As a direct consequence of network externalities, high liq￾uidity of a financial or other exchange increases the value of transactions in that exchange, brings in more orders, and fur￾ther increases liquidity. This leads to the extreme inequality of size and profitability of exchanges and firms affected by mar￾ket liquidity considerations as discussed above. Moreover, con￾sumers are willing to pay more for the high liquidity exchange. Therefore, its profits can be a large multiple of profits of other exchanges. Similar inequality arising out of network externali￾ties occurs in many other products and services. Intensification of competition In network markets, the addition of new competitors, say under conditions of free entry, does not change the market structure in any significant way once few firms are in opera￾tion. The addition of a fourth competitor to a triopoly hardly changes the market shares, prices, and profits of the three top competitors.5 This is true even under conditions of free entry. However, the fact that the natural equilibrium in network industries is winner-take-most with very significant market inequality does not imply that competition is weak. To the con￾trary, the competition race on which firm will create the top platform or be the top exchange, and reap most of the bene￾fits is, in fact, very intense. Moreover, the network also has an expansionary effect as it typically makes it easier and cheap￾er to buy the good or service. Thus, the size of the market also expands. In a way, it may seem paradoxical that there is intensifica￾tion of competition combined with increasing market concen￾tration, since that is not possible in non-network markets. But in network markets, and markets facilitated by the Internet, intensification of competition goes hand-in-hand with increas￾ing market concentration. Under intense competition, small competitors are forced to innovate to avoid being completely squeezed out of the mar￾ket. In a very interesting example, radically breaking with tra￾dition, the Island ECN decided to open its limit order book to the public so that it can attract more liquidity. Traditionally the limit order book was held close to the vest of the specialist or the exchange. So far, opening the limit order book to the pub￾lic has been successful for Island, but it has not prompted the same action by larger competitors. The Impact of the Internet on financial markets 1 For a detailed discussion of these issues see Economides (1996). 2 See Economides (1993), (1994), Economides and Schwartz (1995). 3 See Economides and Flyer (1998). 4 Due to the natural extreme inequality in market shares and profits in such markets at any point in time, there should be no presumption that there were anti-competitive actions that were responsible for the creation of the market share inequality or the very high profitability of a top firm. Great inequality in sales and profits is the natural equilibrium in markets with network externalities and incompatible technical standards. No anti-competitive acts are neces￾sary to create this inequality. 5 See Economides and Flyer (1998). Table 1, taken from this paper, shows market coverage and prices as the number of firms with incompatible platforms increases. Maximum potential sales was normalized to 1. 10

Table 1: Quantities, Market Coverage, And Prices Among Incompatible Platforms Number Sales of Sales of Marke Price of Price of Price of Price of of firms largest firm second firm ird firm largest firm second firm third firm smallest firm ∑刂=q pl 6666 0.222222 2.222e-1 0.6357 02428 08785 0.T2604 00294 2948e2 00035 0169881 00030 0169873 00030 0169873 00030 Note that the addition of the fourth firm onward makes practically no difference in the sales and prices of the top three firms. Inequality of profits is even more pronounced. tries. Moreover, by its nature, the Internet has created new Disintermediation and standardization products that span borders. How national and international As mentioned earlier, one of the direct effects of the inter- laws will deal with them is uncertain net is the elimination of the middleman. when brokers that used to intermediate between customers and markets are Security And Privac eliminated and orders go directly to market, there are two The Internet was created as a basic network of low security important consequences. First, the specialized information on top of which more sophisticated secure communication originally clients is no longer available just to large clients. Large clients created to effect only loose integration among the computers typically lose an advantage. Second, the products offered in it interconnected, which were running various operating sys. markets tend to be standardized, and this increases liquidity tems. In its present form, the Internet allows easy unautho- further. Moreover, often the existence of the network brings rized access to proprietary user data even for sophisticated together two markets of similar products that used to be trad users who take precautions d under different specifications, which now become a single market of higher liquidity and increased standardization Moreover, the vast majority of Internet users are totally unaware of the security threat that the Internet poses on their Changing legal norms rivate information. By its nature, communication is two-way; The law that governs the Internet is, to say the least, uncer- in the absence of sophisticated protocols to block access to in. there are crucial unanswered questions private data and to encrypt transmitted data, Internet com- operty law and contract law, as well as many issues of trans- munication remains very insecure national application of laws. The global nature of the Internet brings to the fore a number of conflicts in business law, as well Many firms collect elaborate information about activities of as of intellectual property and privacy laws of various coun individuals on the Internet, expecting to use it to target adver

Disintermediation and standardization As mentioned earlier, one of the direct effects of the Inter￾net is the elimination of the middleman. When brokers that used to intermediate between customers and markets are eliminated and orders go directly to market, there are two important consequences. First, the specialized information that was available from brokers exclusively to their large clients is no longer available just to large clients. Large clients typically lose an advantage. Second, the products offered in markets tend to be standardized, and this increases liquidity further. Moreover, often the existence of the network brings together two markets of similar products that used to be trad￾ed under different specifications, which now become a single market of higher liquidity and increased standardization. Changing legal norms The law that governs the Internet is, to say the least, uncer￾tain. There are crucial unanswered questions on intellectual property law and contract law, as well as many issues of trans￾national application of laws. The global nature of the Internet brings to the fore a number of conflicts in business law, as well as of intellectual property and privacy laws of various coun￾tries. Moreover, by its nature, the Internet has created new products that span borders. How national and international laws will deal with them is uncertain. Security And Privacy The Internet was created as a basic network of low security on top of which more sophisticated secure communication can be established. The Internet was intentionally originally created to effect only loose integration among the computers it interconnected, which were running various operating sys￾tems. In its present form, the Internet allows easy unautho￾rized access to proprietary user data even for sophisticated users who take precautions. Moreover, the vast majority of Internet users are totally unaware of the security threat that the Internet poses on their private information. By its nature, communication is two-way; in the absence of sophisticated protocols to block access to private data and to encrypt transmitted data, Internet com￾munication remains very insecure. Many firms collect elaborate information about activities of individuals on the Internet, expecting to use it to target adver￾The Impact of the Internet on financial markets 11 Number Sales of Sales of Sales of Market Price of Price of Price of Price of of firms largest firm second firm third firm coverage largest firm second firm third firm smallest firm I q1 q2 q3 ∑Ij=i qj p1 p2 p3 pI 1 0.6666 0.6666 0.222222 2.222e-1 2 0.6357 0.2428 0.8785 0.172604 0.0294 2.948e-2 3 0.6340 0.2326 0.0888 0.9555 0.170007 0.0231 0.0035 3.508e-3 4 0.6339 0.2320 0.0851 0.9837 0.169881 0.0227 0.0030 4.533e-4 5 0.6339 0.2320 0.0849 0.9940 0.169873 0.0227 0.0030 7.086e-5 6 0.6339 0.2320 0.0849 0.9999 0.169873 0.0227 0.0030 9.88e-11 7 0.6339 0.2320 0.0849 0.9999 0.169873 0.0227 0.0030 0 Table 1: Quantities, Market Coverage, And Prices Among Incompatible Platforms Note that the addition of the fourth firm onward makes practically no difference in the sales and prices of the top three firms. Inequality of profits is even more pronounced

The mpact or the nternet on rinancial marke tisements and prices to these individuals. In principle, individ- interfaces ualized prices can be used to extract more surplus as the par. Conclusion: expect the unexpected ticular individual reveals through past behavior his/her will- This short article discusses some important consequences ingness to pay for a good. In this way, individualized prices can of the emergence of the Internet as a global communications eliminate the benefits of mass markets to consumers. Similar- network. The Internet facilitation of information flows ly, individualized advertisements(or individualized sequences smoothes competitive frictions, intensifies competition, and f ads on the web) can, in principle, be targeted to have the promotes a winner-takes- most world. biggest impact based on past behavior. There is not enough evidence yet to show that either individualized pricing or indi- The Internet threatens firms, markets, processes, systems, dualized ads have been successful on the Internet, but they exchanges, and supply and distribution mechanisms that have may become successful in the future. this far been protected from global and intense competition behind national borders, regulatory rules, or geographic loca- Even if the business case for collecting vast amounts of tion. The Internet brings financial markets even more force- information on behavior on the Internet is not yet proven, it lIly into a regime of intense competition and very significant has raised significant privacy concerns. Information on activi- inequality a winner-takes- most world with a very intense race ties that most individuals consider private(such as reading a for the winner and with significant benefits for market partic. particular page of a newspaper on the Internet or monitoring trading activity of a particular stock) may also be the proper ty of various vendors(for example owners of web servers) The Internet has been full of surprises. These include that facilitate this activity. In the United States, people are o its very rapid commercialization and expansion, used to the high legal protection of privacy of telephone con- o the emergence of the Internet browser as a must-have versations. Such a high standard of privacy has not been killer"application in 1994-5, established for electronic mail and other activities on the o the world-wide fast expansion in the use of electronic rnet. The conflict over privacy is looming large in cyber ce law o the huge success of live text- based multi-party chat, and o the emergence of Napster as 6% of all Internet traffic in Overflow of information the fourth quarter of 2000, among others The Internet has been extremely successful in facilitating information flows. Both consumers and managers are over The nature of the internet is such that it holds a tremen- whelmed by the abundance of information. Both groups are dous promise of new processes, goods, and services. Thus unable to take full advantage of the information that flows to despite the careful analysis above, i would venture to say that them every minute. the Internet application and use that would become the most prominent in the next ten years is likely not yet conceived and The need for information filtering is critical. The most need- its impact is unanticipated. On the Internet, expect the unex- ed tools in the upcoming puberty of the Internet will be infor- ected, and you will likely be pleasantly surprised! mation filtering tools and interfaces, such as search engines and hierarchical classification systems. In the absence of such efficient tools, both consumers and managers will fall back to brand names and rules of thumb to select useful information If in the present Internet expansion phase content is king, its next phase will likely be ruled by information filtering and

The Impact of the Internet on financial markets 12 tisements and prices to these individuals. In principle, individ￾ualized prices can be used to extract more surplus as the par￾ticular individual reveals through past behavior his/her will￾ingness to pay for a good. In this way, individualized prices can eliminate the benefits of mass markets to consumers. Similar￾ly, individualized advertisements (or individualized sequences of ads on the web) can, in principle, be targeted to have the biggest impact based on past behavior. There is not enough evidence yet to show that either individualized pricing or indi￾vidualized ads have been successful on the Internet, but they may become successful in the future. Even if the business case for collecting vast amounts of information on behavior on the Internet is not yet proven, it has raised significant privacy concerns. Information on activi￾ties that most individuals consider private (such as reading a particular page of a newspaper on the Internet or monitoring trading activity of a particular stock) may also be the proper￾ty of various vendors (for example owners of web servers) that facilitate this activity. In the United States, people are used to the high legal protection of privacy of telephone con￾versations. Such a high standard of privacy has not been established for electronic mail and other activities on the Internet. The conflict over privacy is looming large in cyber￾space law. Overflow of information The Internet has been extremely successful in facilitating information flows. Both consumers and managers are over￾whelmed by the abundance of information. Both groups are unable to take full advantage of the information that flows to them every minute. The need for information filtering is critical. The most need￾ed tools in the upcoming puberty of the Internet will be infor￾mation filtering tools and interfaces, such as search engines and hierarchical classification systems. In the absence of such efficient tools, both consumers and managers will fall back to brand names and rules of thumb to select useful information. If in the present Internet expansion phase content is king, its next phase will likely be ruled by information filtering and interfaces. Conclusion: expect the unexpected This short article discusses some important consequences of the emergence of the Internet as a global communications network. The Internet facilitation of information flows smoothes competitive frictions, intensifies competition, and promotes a winner-takes-most world. The Internet threatens firms, markets, processes, systems, exchanges, and supply and distribution mechanisms that have this far been protected from global and intense competition behind national borders, regulatory rules, or geographic loca￾tion. The Internet brings financial markets even more force￾fully into a regime of intense competition and very significant inequality: a winner-takes-most world with a very intense race for the winner and with significant benefits for market partic￾ipants. The Internet has been full of surprises. These include •its very rapid commercialization and expansion, •the emergence of the Internet browser as a must-have “killer” application in 1994-5, •the world-wide fast expansion in the use of electronic mail, •the huge success of live text-based multi-party chat, and •the emergence of Napster as 6% of all Internet traffic in the fourth quarter of 2000, among others. The nature of the Internet is such that it holds a tremen￾dous promise of new processes, goods, and services. Thus, despite the careful analysis above, I would venture to say that the Internet application and use that would become the most prominent in the next ten years is likely not yet conceived and its impact is unanticipated. On the Internet, expect the unex￾pected, and you will likely be pleasantly surprised!

References o Economides, Nicholas ( 1993),"Network Economics with Application to Finance Financial Markets, Institutions Instruments, voL 2, no 5, pp 89.9 http://www.stern.nyu.edu/fmi93.pd Economides, Nicholas, (1994),How to Enhance market Liquidity, "in Robert A Schwartz(ed. Global Equity Mar- kets, Irwin Professional. New york: 1994 http://www.stern.nyu.edu/how.pdf works, "International Journal of Industrial Organization, vol.14,no.2,pp.675-699 http://www.stern.nyu.edu/networks/top.html o Economides, Nicholas, and Fredrick Flyer (1998),Com- patibility and Market Structure for Network Goods, Dis ussion Paper EC- Stern School of Business, Ny.U http://www.stern.nyu.edu/98-02.pdf o Economides, Nicholas and Robert A. Schwartz, (1995) Electronic Call Market Trading " Journal of Portfolio Management, vol 21, no. 3(Spring 1995), pp 10-18, http://www.stern.nyu.edu/93-19

References • Economides, Nicholas (1993), “Network Economics with Application to Finance,” Financial Markets, Institutions & Instruments , vol. 2, no. 5, pp. 89-97, http://www.stern.nyu.edu/fmii93.pdf . • Economides, Nicholas, (1994), “How to Enhance Market Liquidity,” in Robert A. Schwartz (ed.) Global Equity Mar￾kets, Irwin Professional. New York: 1994, http://www.stern.nyu.edu/how.pdf . • Economides, Nicholas (1996), “The Economics of Net￾works,” International Journal of Industrial Organization, vol. 14, no. 2, pp. 675-699, http://www.stern.nyu.edu/networks/top.html . • Economides, Nicholas, and Fredrick Flyer (1998), “Com￾patibility and Market Structure for Network Goods,” Dis￾cussion Paper EC-98-02, Stern School of Business, N.Y.U., http://www.stern.nyu.edu/98-02.pdf . • Economides, Nicholas and Robert A. Schwartz, (1995), “Electronic Call Market Trading,” Journal of Portfolio Management , vol. 21, no. 3 (Spring 1995), pp. 10-18, http://www.stern.nyu.edu/93-19.pdf . The Impact of the Internet on financial markets 13