(Originally posted at Toomre Capital Markets.)

Every day, around $2 trillion of currencies are traded, dollars, yen, euros, as spot trades, as well as various types of derivatives, including forwards, forex swaps and options. This sort of volume makes the $200,000 traded daily on the Second Life spot exchange seem particularly small. However, with Second Life’s economy at least tripling annually, it may well be a market worth exploring in detail.

There are various things needed for an efficient market. First and foremost, you need good market data. Second Life provides some good economic data on a daily basis, but is it possible to get this data on a real time basis? Could we set up a market data feed?

At TCM, we look at how to pull together emerging innovations in the financial services industry by thinking outside of the box. Read more to find out what we’ve done so far with Second Life and how it could be used with other emerging tools.

One of the first things I started thinking about is what sort of data I would be interested in. Some of this is less about data needed for analyzing the Second Life market as it is for providing data that I could use for testing other software.

Second Life provides some simple information, such as total Linden Dollar money supply, number of people logged in, number of people who have logged in over different time periods and total number of residents. The money supply appears to be based on total money available to all residents, no matter how long it has been since they logged in. A good analogy is that the money supply that Second Life reports is something like M3. What I would like to find is a more realistic value of money supply, for example, the number of Linden Dollars owned by people currently logged in, or that have logged in over a current period.

Another important part of the Second Life economy has to do with land. Second Life reports on the number of Islands owned, on an end of month basis, as well as a current number. Inside of Second Life, I can find what the most popular spaces are. All of this information would be great to be able to extract real time and provide in a feed to various market data programs that we are testing.

With a little exploration, I came across http://secondlife.com/xmlhttp/secondlife.php. This is an XML file reporting the total population, the number of people that have logged in over the past 60 days, the number of transactions, and the number of people currently logged in. By setting up a routine to gather this, parse it, store it in a database, we have the beginning of a Second Life ticker plant. Are there options that can be passed to the secondlife.php file to gather other information?

Another source pointed me to http://xmlrpc.secondlife.com/cgi-bin/xmlrpc.cgi. This looks promising, but I can’t find any additional documentation. There is documentation on creating objects in Second Life that respond to XMLRPC requests. The best document I’ve found so far is http://www.aiai.ed.ac.uk/project/aiai2/MyRPCObject.html. I followed the document and created a very simple xmlrpc speaking object in Second Life. Following the example, I got it to respond “Hi” to a “Hello there” XMLRPC request. It is easy to see how the script can be modified to provide different information, but I have not done enough scripting in Second Life to extract interesting data yet.

One final tidbit that I found was http://secondlife.com/community/friends-inner.php. This returns a list of friends that are currently online, set up in a way to easily be added to a widget. It is worth keeping in the back of one’s mind, but is probably not especially useful in initial explorations in building a real time market data system supporting Second Life.

As I mentioned at the top of this essay, the currency exchanges that we are most used to dealing with are made up of both spot markets as well as derivative markets. Given the small current volume of the Second Life currency exchanges, there is unlikely to be a great demand for derivatives, however work on establishing a strong market data system for Second Life, including historical data and real time data could lead to interesting growth in the Second Life economy. There is also talk about an Open Source Second Life, and this raises interesting questions about the economy and perhaps even inter-grid trading.

No matter what way Second Life evolves, exploring the market data and the economy of Second Life provides an interesting and hopefully fun way to test emerging tools in the financial services industry.