If Facebook Was a Real Place – Larry Letterio

Comedian David Chappelle once ran a skit where the Internet was a real, physical location wherein you could browse through the stores and services like you would at a shopping mall.  The skit was funny, albeit coarse… certainly NSFW.

After having finally been driven to de-activate my Facebook account, I thought I’d take a look back at Facebook as if it was a real place.

Things started pleasantly enough; like a class reunion in a small town.  The banquet room was clean and simple.  Some old friends were there, as were some distant (and not-so-distant) relatives.  I put on my nametag and walked into the room – cautiously at first.  But things seemed so pleasant I lightened up rather quickly.  Within minutes, we were all exchanging photos, catching up on old times, and sharing topical jokes.  All the while, nobody seemed to mind that I was wearing paint-stained sweatpants and walking around with a Manhattan in my hand!  Pretty cool!   I’m sure some of the other partiers were imbibing too, as evidenced by the occasional “uncomfortable” comments about ex-wives or co-workers.  But hey, nobody was here to judge anybody so the party rolled on.

Like so many parties that go on longer than they probably should, stresses began to appear in the happy façade.  Some woman on the other side of the room (not really a friend of mine – more like the friend-of-a-friend) yelled at me about a conversation I was having with the friends sitting next to me.  We were discussing the financial crisis and suddenly she starts yelling something about a “vampire squid” to the top of her lungs.

Do I know you?

Unfazed, I continued to exchange pictures with my friends.  Here’s my dog.  Here’s the Chicago-style hotdog I bought at O’Hare.  Here’s a bottle of grape soda someone left on my desk.  EVERYONE else had pictures too.  Here’s my kid, standing up.  Here’s my kid, sitting down.  Here’s a picture of the pie I just baked.  We were so busy trading pictures we hadn’t notice the new guys who entered the room.

These new guys were carrying something that looked like rolls of wallpaper and glue.  They walked over to the simple, clean walls and began gluing up advertisements.  The walls began looking like the billboards running along the highway – only more distracting.

Not to be outshone, some of my friends began handing me ads they had carried in their pockets.  “I like these boots, you should too.”  “Samsung’s Galaxy III is the best device ever.”  The religious in the group began handing me placards with biblical passages and spiritual witticisms. The political were pitching Obama, or Romney, or Ron Paul.  The Ron Paul guys seemed very passionate.  Gradually, the party seemed to be deteriorating into a chaotic reenactment of a time-share presentation.

There were also groups of people who seemed to be obsessed with the mafia; others who were really involved in farming.  The obsessions seemed to make them unaware of anything going on outside of their tight little circle.

Then, something happened that began to really unnerve me.  Remember those guys who were pasting ads on the formerly pristine walls?  Now, they were lurking behind me; eavesdropping on my conversations.  If I said I liked fishing, they’d run to the wall and post an ad for Rapalla.   I like Swiss watches?  Bam! The wall now is pitching Rolex.

By now, I could hardly focus on the reason I came to the reunion in the first place.

A little later, a smug, juvenile-looking guy (wearing a hoodie) came around the room and asked all the revelers to give him their business cards.  “Why?, ” I asked.  “I see you enjoy your Manhattans, ” he replied.  “I’ll note that on the back of your business card and send the information to Knob Creek or Blantons or Bookers.  That way, they can contact you directly to explain the merits of their wares.”

At this point, I could see the party was irreversibly heading in a direction of which I wanted no part, so I began making my way to the door.

On my way to the door, I heard news of a national tragedy breaking from a TV in the room’s corner.  Word of the tragedy spread through the party quickly, and reactions to it were severe.  People began screaming their views, berating those who disagreed, and generally trying to shout over each other.   Maybe it was the magnitude of the event that made the attendees act without inhibition.  Maybe they had a little too much “smart juice.”  Maybe this was the logical extension of the already deteriorating party.  Or maybe this is what happens when semi-anonymous people have chairs to stand upon from which they may shout.

I’ll probably never know the answer, since I quietly slipped through the exit and closed the door behind me.

Let me tell you, the cool outside air on my face was really refreshing.


The Market’s Amazing Technicolor Dreamchart

With High Frequency Trading accidents occurring at an accelerating rate (Flash Crash, BATS IPO, Facebook IPO, Knight Capital, and endless single-name examples), it might be nice to see a timeline illustrating just how prevalent these bots have become.

Lucky for us, the good folks from NANEX, specifically Felix Salmon, put together an animated example — using real-time data.

The video that follows illustrates trading volume across all major exchanges (the exchange ID’s are color-coded in the legend on the upper right corner).  The lower left corner shows the dates of the trades as they progress from reasonable volume in 2007 through being monkeyhammered by 2011.

It will take 30 or 40 seconds to get through all four years, but the wait will be rewarded as you see the explosion in volume as the dates approach the most recent.

Draw your own conclusion…

Here is the link:


Random Thoughts and Observations

  • Bill Clinton is officially “off the ranch.”  First, he announces that the Bush-era tax cuts should be extended.  Then, during his apology for the aforementioned comment, he noted that median family income is now lower than it was when he was President.  I never thought I’d miss Bubba, but his candor is kind of endearing.  Never mind his hanging out with porn stars in a Monaco casino.  I REALLY wish I could get this guy to come to a poker game at my house next weekend!

  • France lowered its retirement age for public employees from 62 to 60.  Really?  As your continent financially sinks into the sea, you tack on  a larger fiscal burden?  Granted, Hollande kept his campaign promise, but at some point Germany is going to tire of being slapped in the face by the French man-glove.  A quick read of Der Spieigel will give you some idea as to how soon that fatigue may set in.  I’ll give a clue…  next week.  Fetchez La Vache!
  • This week was the best week for the stock market in 2012.  The 285 point jump on rumors of Fed easing mid-week set the stage for the best week of the year.  Short covering continued through Friday.  I can’t blame the shorts for covering.  Watch for a hyped up European can-kicking announcement this weekend.  Those who are short US Treasuries and long European banks will likely have a nice day on Monday.  Two months from now those trades may not look so great.  But money managers are judged monthly, so many will live or die based on the rumour du jour.  Such is the world in which we live.
  • Despite the Drudge Report’s best investigating, nobody ate any new faces this week.  Time to go long faces and short Drudge, which has become shallow and pedantic.
  • Our President came out today and declared the domestic economy to be “doing fine.”  It may be, for those attending $40, 000 per plate parties at Sarah Jessica Parker’s house.  My anecdotal observations might provide evidence to the contrary.  But I’m loathe to get political on the blog.  I just wonder what he may be smoking.  Maybe the Choom Wagon made a stop in DC  this week.
  • UBS apparently lost $350 million as one of their traders on the Facebook IPO kept hitting the left mouse button over and over assuming his buy orders weren’t being filled since he wasn’t getting timely trade confirmations from NASDAQ.  He ended up owning 40 million shares.  Turns out he bought them at $42 then sold them at $30.  You can’t fix stupid.  Or bullsh*t.  Take your pick.  So, UBS is suing NASDAQ.  The great litigious American tradition.  I assume a “settlement” is in the making.   It shouldn’t, but does, yield a giant yawn.  Lose on your bet, get it back on your lawsuit.

Have a wonderful weekend, folks.

If it were hockey we’d call it a Facewash. In IPO’s it’s called a Zuckerpunch.

The Facebook launch on Friday was much like that of a North Korean missile – much hyperbole, much cheerleading, displays of excited citizens crowding the public square, a launch…  then a thud.

At this point, I have no interest in in opining on Facebook’s pricing, revenue persistence, market penetration, or all that fundamental stuff.  Rather, I thought it may be interesting to point out some of the oddities that occurred during the day of the Taepodong-2… I mean, Facebook launch.

Let’s start with the opening.  Slated to launch at 11:00, the first trade was delayed until 11:20.  While Nasdaq is playing the role of Korean Rocket Scientist today, Telis Demos from Trading Technology wrote a nice piece on the cause of the delay.  Here are a few quotes from the article (although I encourage you to read it in its entirety by clicking the link):

“And it was one quote cancellation sneaking into a five-millisecond window that caused about 20 painful minutes, watched live by the world on CNBC television, of the delay to the opening Facebook’s public offering on Nasdaq’s US market.”

“In brief, the problem was that the system took two extra milliseconds to calculate the opening price. Because of a decision before to allow continuous order placement during IPOs, cancellations kept “fitting in between the raindrops”, in the words of Bob Greifeld, Nasdaq’s chief executive, in the five milliseconds it was taking to determine a price.”

“As a result, Nasdaq had to manually override the process, which took up those 20 minutes. But the manual process meant that individual order confirmations were not sent out until almost 1.50pm, hours after the 11.30am opening print. Confusion reigned, and many blamed it for dampening demand for Facebook stock.”

I’m no rocket scientist myself, but this sure looks like the fingerprints of high frequency trading.  Sneaking a big order cancellation in a five millisecond window would have been impossible for a human being – even the late, great Benevolent Dictator with all his superhuman skills.

The next oddity is brought to us by Nanex Research.  Again, I suggest you visit their site for some great graphic illustration, but I’ll summarize a few of the conclusions here:

  • Between 11:54 a.m. and 1:50 p.m. Nasdaq quotes stopped coming through the conventional channels.  To quote Nanex, “Those who are co-located and get the direct feeds, namely HFT’s, didn’t experience this problem, as trades continued to come from Nasdaq.”
  • At around 1:50 p.m., trades began mysteriously executing 120 milliseconds before the bids printed.  Nanex calls this “fantaseconds, ” or evidence that HFT’s may now be able to 1) trade faster than the speed of light, or 2) orders are being routed in an unconventional manner that may be outside of the regulations.
  • Later that same second (yes, as in 1/60 of one minute), trades were executed 900 milliseconds before the quotes were printed.
  • At the same time, there were stretches where Facebook trades accounted for 100% of all Nasdaq stock trades.

The final extreme characteristic of this launch was Morgan Stanley’s role in supporting the missile’s $38 price.  From Reuters:

  • “Morgan Stanley may have spent billions of dollars to support the stock price by buying shares in the market. Some market participants said that the underwriters had to absorb mountains of stock to defend the $38 level and keep the market from dipping below it.”
  • Morgan Stanley had access to 63 million shares in the over-allotment option, giving them plenty of ammo to hold the line at $38.
  • Reuters also points out:  “As an indication of the cost, had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion.”  That’s a lot of cabbage, if the stink over JP Morgan’s trading loss is any indication.

I think the autopsy of this IPO in the coming weeks will prove to be both interesting and educational.  Has the HFT become self-aware and turned on its creator (Nasdaq)?  What new procedures will be in place to keep a debacle like this from happening on future IPO’s?  How much of a hit to capital will Morgan Stanley ultimately feel?

It’s rare that market sausage-making happens on a stage as large as the Facebook IPO.  Maybe that will help be a catalyst for better understanding our brave new trading world.

In Your Face (book)

On Friday, the most  exciting initial public offering EVER is scheduled to take place.  In case you’ve been locked in Al Capone’s vault and missed the news, Facebook is going public.

The IPO is planned to go off between $35 – $38 per share.  At the high end, this values the enterprise at around $104 billion.  Instantly, the blue-framed website that gives everyone a podium from which to spew “interesting” commentary will be the 9th largest technology company in the world.

Now let’s take a minute to compare IPO Facebook with Apple.  Apple had 2011 revenues of $108.25 Billion.  Facebook’s 2011 revenues weighed in at $3.7 Billion.  Apple closed today with a market cap of $511 billion.  As I mentioned above, IPO Facebook will launch with a likely market cap of $104 Billion.

So…  Facebook, with revenues that are 3.4% of Apple’s will have a market cap slightly larger than 20% of Apple’s.  With any kind of an opening day trading pop, it’s not inconceivable that Facebook ends the day being worth 1/3 of Apple.  Oh yeah.  Apple also has over $100 billion in cash.  Facebook has about $15 Billion.

What does that all mean from an investment perspective?

I’m not really sure.  I’ve been kind of busy hitting the “Like” button on videos of dogs on unicycles, changing my profile picture, sending out Friend Requests and working on Farmville.  There are only so many hours in the day.