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The following example illustrates the broker-dealer’s behaviour. Let us assume that when the price is e100, the broker-dealer receives a buy order for a hundred shares. The strategy he adopts is to supply half that amount from his own portfolio and buy the remaining fifty shares from the market at a price of e101 (supposing the price rises by 1 per cent with the buy order). At this price, the dealer resells all the shares ordered and the price goes back down to e100. The profit comes from selling at e101 the fifty shares he already had in his portfolio at e100.

We now tackle the issue of anonymity by extending the rational expectations model set out in previous articles to a regime of full transparency. Under those assumptions, participants observed only the market price and thus traded under the regime with anonymity. We now compare that case with a regime of full pre-trade transparency in which the identity of both informed and uninformed traders is disclosed and agents can consequently tell whether their counterparts are informed or uninformed.

Let us now comment on the value obtained for ?. Note that the broker who gets the information (e.g. a buy order from a liquidity trader) knows that it does not come from an insider. If this order were fully transferred to the market, the price would rise, since unlike broker-dealers the other agents do not know that it comes from a liquidity trader and thus revise their price estimates upwards. The broker-dealer takes advantage of this discrepancy between the market price and his own best estimate, filling the client’s order in part out of his own portfolio. He is aware that the sale will lower the price, which is why he does not fill the whole order, for if he did so, this would perfectly offset the client’s demand and the final price would be unchanged.

Thus the broker-dealer behaves like a monopolist facing a linear demand curve, and offers half the quantity demanded, so that the price is driven below the marginal cost.

Sunshine trading We assume that information on the identity of some uninformed traders is made public or is known by the other market participants, and that their trading strategies are being pre-announced, which means that the size of the orders they will submit at a certain time in the near future is disclosed. The idea behind this practice is that by pre-announcing, uninformed traders should have lower adverse selection costs; essentially, market-makers should reduce the costs for the orders that they recognize as uninformed. Admati and Pfleiderer (1991) call the pre-announcement of uninformed traders’ orders ‘sunshine trading’. They study the effects of pre-announcement, assuming a market similar to the competitive protocol of Grossman and Stiglitz (1980). Here, however, we analyse the efficacy of sunshine trading in the Kyle-type framework in which agents behave strategically; the Grossman–Stiglitz framework is left for the discussion of anonymity in section 10.1.2. The model used here differs from Kyle’s standard model discussed in section 3.3.2 in that it has two types of liquidity trader: those who pre-announce orders and those who do not. By pre-announcing, liquidity traders disclose themselves as uninformed before trading starts; those who do not pre-announce do not reveal their type. The purpose of the model is to determine the effects of pre-announcement on market quality and traders’ welfare. Which traders will take the other side of uninformed traders’ pre-announced orders is also in question.

The empirical evidence on the effects of transparency, obtained both with field data and experimental works, is also mixed.1 Madhavan, Porter and Weaver (2005) found that execution costs and volatility increased on the Toronto Stock Exchange when the real-time information on the limit order book was made public; Boehmer, Saar and Yu (2005), instead, reported the results of the OpenBook experiment conducted by the NYSE in January 2002, showing that when traders were allowed to observe the depth of the NYSE book in real time, execution costs decreased. We now tackle these topics with the help of the models developed in previous articles, so that we can present the recent contributions to the discussion of transparency. As evidence show, to model transparency it is necessary to specify what information can be obtained ex ante and who can get it. Recall from Figure 1.3 that information can involve order size and direction as well as traders’ identity. Recall also that this information may involve all market participants or only some. Admati and Pfleiderer (1991) analyse the case in which the pre-announcement of orders reveals information on their size and the type of agent making the announcement. Röell (1990) discusses the case of dual trading, where the information on order size and agent type is accessible only to some intermediaries, and Foster and George (1992) and Madhavan (1996) discuss transparency in financial markets more generally. More recent contributions (Foucault, Moinas and Theissen, 2007; Rindi, 2008) take into account the role of market structure and show how greatly the effects of transparency on market quality can differ, depending on the type of information released. For instance, disclosure of the limit order book generally increases liquidity, whereas that of traders’ identities may reduce it.

If you have a special talent, hobby or skill that could create a little nest egg that could be allocated for your invention, this is a great way to come up with the needed cash. Do you have a service you can offer to make extra cash or a product that you can create and sell? Lots of people have taken the time to learn specialized crafting and they can make and sell products or offer a class to teach others the skill. We know of a man whose “regular” job is an airline pilot, but in his spare time, he designs and creates special t-shirts for charity events, sporting events, school groups and so on.

Think about what you like to do in your spare time. Do you play an instrument so that you could provide music for social occasions? Perhaps you know how to bake beautiful pastries or can sew like a professional. Can you groom pets or teach a craft? Get your creative juices flowing about what you could do in your spare time that would bring in the extra income to pay your invention costs.

If you can finance your invention from your own funds, this is the very best, least complicated way to go. We did exactly this with a twist. As we have previously mentioned, quite a lot of the initial steps were funded by our personal savings. Once we were patent pending we started manufacturing and selling Ghostline® on a limited basis. We loaded up the trunk of the car with 100-piece packages and drove around selling it to local independent teacher stores and office supply stores. We made enough money doing this to pay the legal fees when our First Office Action came back from the patent office. An Office Action is any correspondence that comes from the USPTO relating to your application for protection of your intellectual property, whether it is a patent application or a trademark application. Office Actions require a response from whomever is prosecuting your application.

We also made enough money from sales of the poster board to pay for the next run of the product. Several times we repeated the cycle of manufacturing small runs and then selling it to earn enough money for the next run and to pay patent related expenses until we finally received notice that our patent would be allowed. So, even though we weren’t selling a lot of Ghostline®, we were “in the black.” We were covering our expenses as we went.

By proceeding in the pay-as-you-go mode we kept complete control of our product and our company. For us, it was the right decision. Success might have come sooner had we gotten investors or loans, but the comfort of knowing that we were limiting our financial risk was worth the extra time it may have taken. Only you can decide if this is the proper course of action for you and your product. If your product is “time sensitive,” that is if it is essential that you get to market as soon as possible or risk losing out entirely, you may need to consider the following options.

Expenses during the development, protection and marketing phases of inventing do not all occur at once. There is no need to have all the money that will be spent on the project at the beginning of the process. Very few independent inventors have a surplus amount of money set aside with which to pursue their product ideas. Most of us are operating on shoestring budgets. Many have succeeded and so can you. It may be necessary to save for a while and then move to the next phase of your product development. Then save again for the next phase and so on. As you read this book – or any book that details the steps in product development – you will see that there are lots of details related to your invention that you could be doing while you are saving between expenditures. So, it isn’t as if you have to spend all of your time in a holding pattern while you accumulate the needed funds.

Shoestring Budget™ inventing does not mean cost-free inventing. If only that were the case! It means that you must contribute, at least some of your own money, to the project. You may be saying, “But, I don’t have any money!” If that is the case, then you might as well stop now. Almost anyone can tap into savings or plan for future expenditures by saving small amounts as they can for something that is really important to them. As we mentioned in an earlier chapter, an inventing project does not require that you have the entire amount at the start. It is very possible to pay for your invention in segments as you move through the steps. In fact, that is the way it must be done since product development, protection and marketing take place over a somewhat extended period of time and the expenditures are made in different areas, such as prototyping, legal, and so on.

When we were first inventing our product, Ghostline ®, we were the epitome of Shoestring Budget™ inventors. We were a couple of wives and mothers who were working full time jobs and we did not have a lot of expendable income. We did have faith in our idea; enough faith to dip into our savings to get our first prototypes made. We did it in bits and pieces.

First, we each contributed about $200, when that money was exhausted we each dipped into our savings again to replenish our “company fund” in order to have the money to continue the prototyping process. Thankfully, our first visits to patent attorneys were free (we interviewed several patent attorneys before selecting one) but when the time came to start the patent application we each dipped into our family savings again. If you truly have faith in the potential of your idea, you will be willing to invest at least some of your own money. If you do not have enough faith in your idea to put your money, even if it is limited, where your mouth is, stop now. Do not waste your time or anyone else’s.

It is often the case that an individual who is very creative about coming up with a great idea does not use that same creativity when it comes to finding the money to move forward with it. It is our aim in this chapter to shed some light on how to approach the problem of funding your invention. As a Shoestring Budget™ inventor, the very first place you should look for help is in your mirror. We know that is not what you want to hear, but it is the truth of the matter. Before others would even consider investing in your idea they would need to see that you had enough faith in your idea to put your own money where your mouth is. Many independent inventors have the very mistaken notion that the idea for a terrific new product is contribution enough on their part. Wrong!

Using the patents that are most similar to your invention, click on the link for each patent that is listed under “References Cited.” This is the prior art that has been listed as being the most similar to that patent. This is where you will find the patents that are similar, regardless of when they were issued. Often you will find patents dating back many years in this section. Examine each of those carefully, looking at the images if you need to, in order to understand how they are similar or dissimilar to your idea. If you continue to pursue your invention and a patent application is filed, some of these same patents may be cited as prior art on your application. Look at the classification numbers on these patents to make sure that you have not missed one that should be checked.