Patent Nuclear Stockpiling Reaches Wall Street

from the surprise,-surprise dept

In their book, Innovation and Its Discontents, professors Adam Jaffe and Josh Lerner discuss the case of Vergil Daughtery, who created and then patented some “new” ideas for financial derivatives. However, as they point out, the ideas weren’t new at all, but were commonly discussed in economic and financial research for decades (Daughtery, it should be said, disputes this claim, and says his patents are different). However, the publicity from Daughtery’s patents, combined with the courts saying that you could patent things like business models has made it fashionable for Wall Street firms to start stockpiling as many patents as possible. Very similar to the situation with software patents, it’s quickly become clear that this has absolutely nothing to do with inventing something new and using the patent system to share that data, but to create a “nuclear stockpiling” situation that keeps the financial firms from suing each other — while keeping smaller firms out of the market. Given the ridiculous rewards for patent hoarding these days, it’s no surprise that these firms may view it as a lucrative practice. However, it appears to do little to actually encourage real innovation. Financial derivative products are historically built off of one another — and the rewards for them are found not in protecting them, but in the actual marketplace. If those financial products work, then there’s plenty of direct rewards. Why do they need some government-mandated protectionism to retard the actual market? Who would have thought that Wall Street firms would be so desperate to hang onto government-supported monopolies rather than the free market?

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Comments on “Patent Nuclear Stockpiling Reaches Wall Street”

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G. Kidd says:


There’s a common myth that businessmen “love the free market.” *NOTHING* could be further from the truth. Consumers love the free market (and benefit most from it) because of the wider choice of goods and services they get and which they can tailor to their own needs and wants.

Businessmen, OTOH, love nothing more than having cozy monopolies enforced by government guns so they don’t have to worry about somebody coming along and eating their lunch. The behavior of the telephone companies, MPAA, RIAA and many other members in good standing of the corptocracy over the past decades should have disabused anybody about the “love of the free market” which supposedly permeates businesses.

Mark says:

Free market

“Who would have thought that Wall Street firms would be so desperate to hang onto government-supported monopolies rather than the free market?”

That would be anyone who realizes that businessmen are in business to make money, not defend economic principles. Who do you think invented trusts, evil geniuses plotting diabolical plans in volcano hideouts? No, it was businessmen who wanted to make a buck at the expense of the consumer. That’s business — and that’s why we have anti-trust laws, because business can not be trusted to be self-regulating.

Anonymous Coward says:

Well, to defend the ideal of a free market.. its a free market that allows these eventual monopolies to wage a competitive war that crushes the competition and then allows them to continue to exist to milk the newfound monopoly status. And they love it still because other large companies can afford the huge expense to attempt to move in a sector previously held by a monopoly or set of oligopolists.

Contrasted with a more socialist economy, highly regulated with businesses making little (or not existing in certain industries or services) and being legally unable to compete with the government. Parts of the market that ARE more open are hindered in potential by the waste generated from large government control.

All it takes to break a monopoly is balls, anyway. Microsoft, for example. Does anyone REALLY think a combo with a highly refined Linux distro (of which none are currently up to the task, but again with the large company and large resource requirement) and a large OEM, or an alliance thereof, couldn’t send Linux penetration through the roof compared to today and blow even MacOS out of the water? Of course, execs with sufficiently voluminous sacks either don’t exist or if they do they aren’t accompanied with enough brain mass to figure out how to really get rich from doing so, but still.

Anonymous Coward says:

Re: Re:

Oh, and to reply to myself, if a company like HP or Gateway were private or taken private instead of being publicly held, they could try something with Linux just like that purely for the sake of giggles or to play out some grudge against Microsoft, or to get bargaining chips out of MS. Without being publically held it doesn’t have to make money, it just has to not destroy the company. All thanks to free markets.

Dave says:

who invented what ..

“figuring out how to price an expiration-less option. Unlike the Black-Scholes formula, which generated values only for options that last a finite period of time, Daughtery’s discovery would let investors price options that last forever”

Isn’t this Black-Scholes-Daughtery formula derived from calculus invented by either Leibniz or Newton. The only difference being it refers to money.

“Calculus .. is concerned with the instantaneous rate of change of quantities with respect to other quantities”

Now when is someone going to come up with a formula that ties fluctuations in the value of the $dollar to random fluctuations in the quantum vacuum.

Vergil Daughtery (user link) says:

Re: who invented what ..

1. A European option can only be executed on the last day of the option’s life.

2. Black-Scholes-Merton-Samuelson stated that the price of a perpetual European call option was equal to the underlying security price, despite the fact it could never be executed (yes, I know that’s impossible, but that’s what they said).

3. A contract which “has no reasonable expectation of coming to fruition” is invalid, and thus valueless, dating back to English common law of contracts.


1. The Black-Scholes-Merton-Samuelson methodology cannot exist in the real world without violating common law;

2. The Black-Scholes-Merton-Samuelson methodology cannot exist in the real world without creating arbitrage opportunities; (e.g., sell an out-of-the-money perpetual call, buy the underlying asset, repeat ad infinitum, take over the company);

3. The Black-Scholes-Merton methodology cannot be used to price expirationless/perpetual/non-expiring options;

4. The Black-Scholes-Merton methodology should not be used to even price expiring options, because it over-estimates the probability distribution of prices for expiring options. This happens because B-S-M assumes that the maximum price of an expiring option is the price of the underlying asset, which is incorrect (see above). The maximum price of an expiring option should be the price of an otherwise identical non-expiring (American) option, which must have a price less than the underlying asset or arbitrage occurs (also see above).


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