In 2012, the Intellectual Property Exchange (IPXI) is positioned to launch as the world's first patent-based bourse. IPXI has gained financial support to the tune of $10 million from the Chicago Board Options Exchange (CBOE) and Royal Philips Electronics NV to launch its financial exchange in Chicago, a city with a history of hosting trading platforms for stocks, commodities and even carbon.

Founded in 2009 by Ocean Tomo, IPXI has five major entities aboard the bourse. In addition to Philips, founding members of the exchange now include Com-Pac International, Northwestern University, Rutgers University and the University of Utah -- each of which commit to list a minimum aggregate market value of $50 million. While the founding members are few, the number of patents and patent portfolios they hold are many. For example, founding member Philips will trade licenses from some of its more than 55,000 patents, according to IPXI's CEO Frans van Houten, reporting in De Telegraaf.

The process of listing an IP asset on IPXI involves packaging patents into Unit License Rights (ULR) contracts that will look similar to the trade in shares to interested investors. Unlike stock, investors in ULR contracts will gain the right to license a unit of intellectual property. The IPXI exchange aims to replace, or at least supplement, the existing bilateral licensing model for patents.

It will have both liquidity providers and operational users, according to IPXI founder Gerard Pannekoek, speaking with John Lothian News editor Nicole V. Rohr. Operational users are those who are seeking a license to use a technology. The secondary market includes interests in derivative products, such as options on ULR contracts.

“Secondly, the market will be accessible for qualified institutional buyers,” said Pannekoek. “Those are sophisticated institutional investors, investment firms, that have already started to view IP as an asset class.”

Does the financial market really need derivative financial instruments in patents? Derivative markets have grown significantly, as has concern about its operations and regulations. It includes future contracts, forward contracts, swaps and options. Underlying assets in derivative markets can be an assortment of assets, such as commodities, currencies and stocks. It can also include derivatives based on speculations on future weather patterns. When you can hedge on the weather, any argument against hedging on patent interests becomes a difficult argument.

For patent futures, investors would be hedging against the risk of the underlying patent's success or failure or the future rise or fall in its trading price on the financial exchange. As with any derivative, the central question is whether the underlying patent asset is worth more than its trading value at any given time.

The IP exchange is not a completely novel concept. In June 2009, ICAP, headquartered in London, announced an agreement with IPXI's parent company, Ocean Tomo, to acquire what included its Intellectual Property Live Auction transaction business and its Patent Bid/Ask Platform. These platforms focus on buying and selling patents, while Ocean Tomo's IPXI venture focuses on a licensing and derivatives model for patents.

In its first few years as an operating exchange, the success or failure of IPXI will be driven more by global financial market dynamics than by its own intrinsic value as an exchange platform. At this time, global financial markets are taking cues from developments and volatility within the E.U. financial markets as the strongest indicator of the direction of global financial market directions into 2012. IPXI's ability to attract secondary market investors in its patent derivative market will be more likely impacted than its primary licensing exchanges to those seeking to use the patent ideas. As to the former, timing in launching its exchange may be a crucial factor in its future success or failure.