P/E Ratio
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Tells how much investors are paying
per dollar of profit
Shows how expensive a stock is
Historical average = 14-16
Current average (see WSJ online)
Stock Indexes
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Dow Jones Industrial Average
Dow Jones Total Stock Market
Nasdaq Composite
S&P 500
Russell 2000
NY Times Article: New Speed of
Money Reshaping Markets
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Electronic trading used by dozens of
exchanges – NYSE, Nasdaq, BATS
Direct Edge in NJ is one of top 4
exchanges
CEO = former lawyer for GS
Trading done by computers talking to
other computers at high speeds
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DE receives up to 10,000 orders a
second
Time for average order “round trip” is 98
microseconds (98 millionths of a second)
Exchanges are catering to High
Frequency Traders (HFT)
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HFT use algorithms to zip in and out of
markets
First to react to events
Take advantage of mispricing between
stocks or differences in prices across
exchanges
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Use computers to speed read news
reports
Computers interpret the news and make
trade decisions
HFT accounts for 56% total stock
market trading
Flash Crash May 6, 2010
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Dow dropped > 700 points in a matter of
minutes
Traced back to a computer trade by
Waddell & Reed (mutual fund)
Now have circuit breakers on individual
stocks to halt trading if price falls 10% in
5 minutes
Andrew Lo, MIT
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Regulations haven’t kept up with rate of
change in technology
Too much technology can yield
unintended consequences
How much HFT do we really need???
Markets are for capital formation and
long-term investment, not gaming
The Primary Market
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Private placement of stock – GS and
Facebook
1/21/2011 $1B in Facebook stock sold
to foreign investors
Could have raised $5-7B (oversubscribed)
Additional $500M sold to Russians in
Dec. (Digital Sky Technologies)
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Offering put value of Facebook at $50B
Value = Market Cap
Worth more than eBay or Yahoo
Value was at $10B in 2009
Facebook IPO?
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GS private placement structured as
special-purpose vehicle, which counts
as one shareholder of record
But Facebook announced that intends
to increase its number of shareholders
above 500 this year
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SEC requires private firms with 500 or
more shareholders to publicly disclose
certain information
Must register as a reporting company
within 120 days after the end of the year
in which the limit is breached
Deadline for Facebook = April 2012
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GS Private Placement limited to foreign
investors
Regulation D says private placements
cannot be the subject of advertising,
general promotional seminars, or public
meetings
GS concluded level of media attention
was too high to comply with Reg D
Facebook Natural Monopoly?
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Business model or technology
impossible to replicate
Can extract high profit margins for
foreseeable future
Largest community of social networkers
Most-visited site in US
Deserves valuation closer to Google?
Other IPOs
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Groupon – IPO this fall – raise $1B –
value $15B
Martha Stewart - 1999
World Wrestling - 1999
Classifications of Financial
Markets
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Debt
versus
Equity
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Money versus
Capital
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Primary versus
Secondary