It’s puzzling that an investment bank would open an office in Second Life, given the virtual world’s mixed reputation. “I think Second Life is a joke,” says Dan Rayburn, executive vice president, StreamingMedia, a news media company that covers the streaming media industry. “It's just another example of companies seeing new technology and rushing to use it all the while forgetting that no technology means anything unless consumers adopt it.”

“My joke is that Second Life is for people who don’t have a first life,” says Robert Ellis, senior analyst at Celent.

Companies that have already set up a Second Life presence, such as Toyota, use it to market their wares to Second Life residents. Approximately two million people (four million avatars) use the site; according to Linden Lab they have a median age of 32, 42% are female and 58% are male. Toyota lets residents design their own cars – presumably, it funnels their preference information into new car designs. Sang Lee, managing partner of Boston-based Aite Group, sees the value in such experimentation. “If I were [a company with a Second Life presence] I’d do whatever I can to capture data on how people are interacting with some of the products and services they have,” he says. “I think it would be an easy, cost-effective way of testing new products and services.”

To Saxo Bank’s head of product development, Stephan Martinussen, the Second Life initiative is simply an extension of the company’s online business -- it already offers trading on PCs, web clients and mobile devices. “We didn’t want to sit back and wait, we wanted to learn along with the rest of the virtual world of Second Life," he says. "Some people compare the early days of Second Life to the start of the Internet. I don't know that I'd go that far, but I do think if we had waited to make the best of business opportunities on the Internet, then we wouldn’t have gotten where we are today. When there’s a new major trend online, we need to be part of it."

When asked about the idea that people create false identities in Second Life to do things that they might hesitate to do in real life, Martinussen agrees. "We know that Amsterdam is big there, and that sex is a big driver of Second Life," he acknowledges. "But then, look at the Internet, there’s quite a bit of sex out there and that doesn’t keep us from doing business there."

Saxo Bank is proceeding with caution when it comes to currency exchange and other types of trading with real dollars on Second Life. The trading game the firm offers in its Second Life office offers only a small Linden dollar prize (Linden dollars are the virtual money residents use to pay for virtual goods such as real estate and clothing). Saxo's next step will be to create a user interface to let residents access real account information from the Second Life site. At some point, Saxo plans to offer a Linden dollars-for-real dollars exchange, but not until Second Life has an economy in place. "We need better proof that this is an actual economy," he says. "There are a few items missing here, there’s no commodity price, no real cost of labor in this production process." For instance, a new Second Life product, such as a pair of shoes, costs a developer his time the first time he builds it, but from there on he can issue as many new shoes as possible at no cost.

A trading exchange called LindeX already exists on Second Life. It’s a peer-to-peer platform that lets users affect the purchase and sale of Linden dollars. The Linden dollar is not pegged to any real-world currency, but floats according to supply and demand. The current exchange rate is around 275 Linden dollars per U.S. dollar.

Observers say providing virtual-to-real currency exchange is a natural fit for Saxo. “They primarily do foreign exchange, so this is right up their alley,” says Ellis. “This is just a different kind of foreign exchange.”

Less clear is how the Linden dollars will be backed up and what's to keep Second Life residents from running away instead of paying their debts. “The SIPC stands behind your account at Merrill Lynch for $2 million, who stands behind your account at Saxo Bank at Second Life?” notes Ellis. “We know you can put your money in, the question is can you get your money out?” Linden Lab’s director of marketing Catherine Smith says, “While Linden Lab tries to foster a framework of internal, community-based dispute resolution, there is recourse that users who suspect fraud can pursue with the company itself. Linden Lab is committed to providing a secure commercial environment for all of its users, and will continue to do the utmost to preserve these safeguards.”