Goldfacebookman: bubblenomics ahoy!

Paul Raven @ 06-01-2011

So, Goldman Sachs is investing in Facebook. Lots of furore in the media: Facebook’s worth US$50billion, you know! Well, given recent events, I’m not sure I’d trust Goldman Sachs to accurately value anything other than their own scaly skin, but there you go. My cynicism is largely uninformed and instinctive, but smarter folk than I are looking beyond the gloss:

… you can look at the economics and note that Goldmans is buying under 1% of an illiquid stock, thus valuing the whole 100% at $50bn, and that to justify such a valuation at maturity (at say c 5x revenue valuation, like Google) would imply revenues of $10billion. Given that it already claims c 500m users (1/8th of the world’s online population, because as we know, there are no false accounts on Facebook) it is hard to believe much more than a doubling of users, so say 1 billion users. So, $10 bn over 1 bn users is $10 per user per annum (vs c $4 today), or say $1 / month. Sounds possible, except you have to remember that many users hardly use the system, and social media ads tend to have CPM in the fractions of pennies, so you are having to believe they can ship hundreds of thousands of Ads to each person each month, or can sell online goods – ie demi-freemium funding – but that typically only attracts c 5% of users, so you are looking at $20 per month per paying instead.

My take – Don is right, the good assets are expensive, but $50bn is a valuation based on a microstake. Goldman Sachs are not fools, but this is basic bubblenomics – and bubbles are built on the Bigger Fool Theory, ie there will be bigger fools who will buy these shares from Goldman. When you see private Facebook shares being sold to the “Man on the Street” its time to run for the hills.

Here’s the kicker:

The one sure thing you can tell from this is that Facebook clearly can’t self fund itself enough for what it needs, even on $2bn turnover a year.

And here rephrased by Ian Betteridge:

A web site which has 500 million users, 1/8th of the entire population of the Internet, doesn’t have a business model capable of supporting itself.

Ouch. More interesting still is that Goldman are inventing some brand new voodoo finance stunts specifically for this gig:

What Goldman Sachs is proposing to do is create a $1.5 billion, so-called “special-purpose vehicle” — a term that could only have been conjured on Wall Street — that would allow its high-net-worth clients to invest in Facebook.

The participants in Goldman’s Facebook “special-purpose vehicle” would not be considered Facebook owners “of record,” but rather “beneficial” owners. In other words, for the purposes of the Securities Exchange Act, Goldman’s Facebook “special-purpose vehicle” would constitute one owner “of record,” no matter how many Goldman clients participate.

Thus, it would appear that Goldman Sachs and Facebook are attempting to avoid SEC disclosure rules and allow Facebook to remain private for as long as possible, but still make it easy for Goldman’s rich clients to invest in the company.

The SEC is apparently keeping an eye on things, but you’ll forgive me, I hope, for not taking that as an assurance that some seriously shady shit won’t go down anyway. Are our memories really so short? Ooooh, look – shiny!


Get up to speed on high-frequency trading

Paul Raven @ 29-07-2009

New York Stock Exchange buildingRemember that story we ran a few weeks back about the alleged theft of the Goldman-Sachs automated trading code?

Well, thanks to said case, Goldman-Sachs and the high-frequency automatic trading (HFT) practices that they dominate are increasingly sliding into the spotlight of Congressional scrutiny, so Ars Technica have knocked up a brief guide to what it’s all about. If you thought “the markets” were those guys in suits shouting at each other on the trading room floor, think again. [image by Coffee Maker]

If you look under the hood of the markets in 2009, you’ll find that the trading floor has been replaced by electronic networks; the frantic, hand-signaling traders have been replaced by computer systems; and all of moves in the trader’s dance—a thousand little tricks and techniques (some legal, some questionable, and some outright illegal) for taking regular advantage of speed, location, and information to generate profits—are executed hundreds of times per second, billions of times per day. And the whole enterprise is mainly powered by the same hardware from Intel, AMD, and NVIDIA, that Ars readers use for gaming.

[…]

Only about three percent of the trading volume on the NYSE is actually carried out by means of traditional “open outcry” trading, where flesh-and-blood humans gather to buy and sell securities. The other 97 percent of NYSE trades are executed via electronic communication networks (ECNs), which, over the past ten years, have rapidly replaced trading floors as the main global venue for buying and selling every asset, derivative, and contract. So the ECNs are the markets in 2009, and those pit traders who pose for the cameras are mainly there for the cameras.

In other words, Josephine Average Stock-Trader is going head to head with supercomputers every time she dips a toe into the game. The ECN algorithms specialise in making millions of tiny trades, each making fractions of pennies of profit – small beer when considered in isolation, but big profits when scaled up to the sheer volume of transactions that these systems can handle.

It’s like a vast virtual ecosystem of predatory code-critters; go find out more about it. Know thy enemy, and all that.


32MB of code that’s worth billions is somewhere on the web

Paul Raven @ 07-07-2009

In what appears to be a very contemporary story of industrial espionage, we discover that 32MB of computer code could be the key to the success of one of the most powerful financial organisations on the face of the planet – and that someone may well have copied and uploaded it  for purposes unknown. [via SlashDot]

While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.

The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.

The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-profitable automated trades.

This is somewhat of a double bind for Goldman Sachs, as prosecuting the alleged theft will require them to reveal a certain amount of their business secrets at a time when people aren’t best disposed toward Wall Street profiteering. It also sheds a less than flattering light on the FBI’s investigative priorities:

What is probably most notable, in less than a month since Sergey’s departure from [Goldman?], the FBI was summoned to task and the alleged saboteur was arrested and promptly gagged: if anyone is amazed by the unprecedented speed of this investigative process, you are not alone. If only the FBI were to tackle cases of national security and loss of life with the same speed and precision as they confront presumed high-frequency program trading industrial espionage cases… especially those that allegedly involve Goldman Sachs.

I think this is going to be one of those stories that will grow with the telling, and Goldman Sachs are going to come out looking bad whether they win or lose the case. Couldn’t happen to a nicer bunch of people, AMIRITE?