The Digital Skeptic: BEN Spells END for markets

NEW YORK ( TheStreet) -- It's not just investors' NCAA brackets that got busted by the Web this year. Oh no. This time, already-feeble large financial trading hubs -- and I am talking the first-line, monster ones such as the New York Stock Exchange, Nasdaq and Direct Edge -- are facing a way-weird, digital-age body blow.

From of all things, and I know this sounds crazy, a mobile fantasy sports betting app.

In September, a Manhattan-based start-up called the Binary Event Network released an early version of an iPhone app called TradeSports. The app, which quickly became a top free sports download on the Apple ( AAPL) App Store, lets users place virtual bets on sports events in real time as games unfold.

TradeSports is not gambling; real cash does not change hands. Players, rather, vie for street cred and points that lead to prizes. And TradeSports hosts only play for big-name sporting events in leagues such as Major League Baseball, the NFL and the NCAA.

But founders say a more powerful and ubiquitous platform is due out this summer. And the sports experience behind TradeSports is powered by a technology that can gather real-time valuation information not just on sports, but on any event anywhere in the world.

"We are starting with sports as a way to test our platform," Greg DePetris, founder at BEN, told me during one of the several calls we had as I was making sure I was getting this all correct. "But there's no reason why we can't provide the most accurate predictive information on the outcome for any event."

Here comes the mind-boggling part for investors: DePetris makes a heck of case that possible predicted outcomes most definitely can include the price of a stock, the value of a bond and/or the expected cash flow of a derivative.

Pricing the binary event
Before you dismiss DePetris as an untested kid-entrepreneur with dumbass dreams of bringing dopey social media or game theory to big-boy real world trading, know this: He co-founded the controversial international betting platform Intrade. Though DePetris left Intrade several years ago -- well before it fell afoul of regulators and was shuttered in March for alleged trading irregularities -- the service hosted money bets on everything from who would win the last presidential election to whether North Korea would invade South Korea.

And DePetris puts a price tag on reality with startling ease.

"Public perception of world events is formed, fueled and changed by real-time media coverage and content," he explained to me in an email. He said that any potential event really only has two possible outcomes: They either happen or they don't. That is, they have a 100% chance of occurring or a zero percent chance of occurring -- that's what DePetris dubs a binary event. What changes, he said, is the public perception of the current chance of the outcome of that binary event. And his tools pool and measure those perceptions as fast as they are perceived.

"The trick is, the system measures consensus sentiment that reacts to new information as quickly as it is created -- similar to the NYSE or Nasdaq," DePetris wrote. "And actually probably even more accurately."

Cleaning up a mess of a market
Remarkably, the notion that a simple mobile sports app could be more efficient at digesting and pricing world events than a traditional market such as the Nasdaq is supported enthusiastically by experts in modern financial trading technology.

"The complexities of modern markets are often overwhelming the underlying value of a stock," David Lauer told me.

Lauer is a former trader at Citadel Investment Group, a global investment shop with offices in New York. He is now an independent market structure and technology architecture consultant who has testified in front of Congress on the pitfalls lurking in today's high-tech trading world. Lauer explains that the problem is that it's not just the Nasdaq or NYSE that prices a stock. In today's collapsing digital age, they're among many factors.

That increases complexity, reduces transparency and obfuscates price.

"The system is so ragged now that market movement is often devoid from reality," he told me.

And at least based on this past few weeks using TradeSports, even in its pure, sports-only format, this app clearly has the game to be a massive well-oiled trading platform.

Think I'm nuts? Take a look at this released data on the recent NCAA tournament's early rounds that shows real-time "value" for the Ole Miss-Wisconsin game, the Memphis-St. Mary's match and many other matches. The valuation narrative is clear: If traders did it right and bought, say, Ole Miss right after halftime, they would have tripled their return by the buzzer. Which is pretty much what happened in the game.

It's the same old digital age country western heartbreaker: Just like how Bitcoin is making currency look obsolete, Binary Event Network is making the New York Stock Exchange, Nasdaq and any other modern financial trading platform yesterday's news.

And that's means, yet again, just like in the music, movies and legal profession, the systems we have for making money trading on tomorrow ... probably have no tomorrow.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.