P/E Ratio n Tells how much investors are paying per dollar of profit n Shows how expensive a stock is n Historical average = n Current average (see WSJ online)

Stock Indexes n Dow Jones Industrial Average n Dow Jones Total Stock Market n Nasdaq Composite n S&P 500 n Russell 2000

NY Times Article: New Speed of Money Reshaping Markets n Electronic trading used by dozens of exchanges – NYSE, Nasdaq, BATS n Direct Edge in NJ is one of top 4 exchanges n CEO = former lawyer for GS n Trading done by computers talking to other computers at high speeds

n DE receives up to 10,000 orders a second n Time for average order “round trip” is 98 microseconds (98 millionths of a second) n Exchanges are catering to High Frequency Traders (HFT)

n HFT use algorithms to zip in and out of markets n First to react to events n Take advantage of mispricing between stocks or differences in prices across exchanges

n Use computers to speed read news reports n Computers interpret the news and make trade decisions n HFT accounts for 56% total stock market trading

Flash Crash May 6, 2010 n Dow dropped > 700 points in a matter of minutes n Traced back to a computer trade by Waddell & Reed (mutual fund) n Now have circuit breakers on individual stocks to halt trading if price falls 10% in 5 minutes

Andrew Lo, MIT n Regulations haven’t kept up with rate of change in technology n Too much technology can yield unintended consequences n How much HFT do we really need??? n Markets are for capital formation and long-term investment, not gaming

The Primary Market n Private placement of stock – GS and Facebook n 1/21/2011 $1B in Facebook stock sold to foreign investors n Could have raised $5-7B (oversubscribed) n Additional $500M sold to Russians in Dec. (Digital Sky Technologies)

n Offering put value of Facebook at $50B n Value = Market Cap n Worth more than eBay or Yahoo n Value was at $10B in 2009

Facebook IPO? n GS private placement structured as special-purpose vehicle, which counts as one shareholder of record n But Facebook announced that intends to increase its number of shareholders above 500 this year

n SEC requires private firms with 500 or more shareholders to publicly disclose certain information n Must register as a reporting company within 120 days after the end of the year in which the limit is breached n Deadline for Facebook = April 2012

n GS Private Placement limited to foreign investors n Regulation D says private placements cannot be the subject of advertising, general promotional seminars, or public meetings n GS concluded level of media attention was too high to comply with Reg D

Facebook Natural Monopoly? n Business model or technology impossible to replicate n Can extract high profit margins for foreseeable future n Largest community of social networkers n Most-visited site in US n Deserves valuation closer to Google?

Other IPOs n Groupon – IPO this fall – raise $1B – value $15B n Martha Stewart n World Wrestling

Classifications of Financial Markets n Debt versusEquity n MoneyversusCapital n Primary versusSecondary