SLCX CEO Report - 11/18/2007 - "Circuit Breakers & Market Makers"
Several people have asked this week why the SL Capital Exchange has implemented "Circuit Breakers" and have inquired as to what they are and how they work. So... here ya' go... (Bo's take...)
In 1988, following the RW Stock Market Crash of Monday October 19, 1987 (Black Monday), where the Dow Jones Industrial Average dropped 500+ points (roughly 23%) in just one trading session, Market Regulators began looking for procedures to help prevent panic selling in times of serious market declines and volatility. The mechanisms they ultimately settled on, (Circuit Breakers, Collars, Curbs and Price Limits), collectively seek to level the playing for retail Investors versus Insiders and automated Trading Programs. While each mechanism differs in their application and trigger implementations, together the idea is that they help limit the damage that can be done by panic selling by restricting activities that might lead toward volatility and large price moves, and, by encouraging trading activities that tend to stabilize prices. Admittedly, these mechanisms are not without their critics - I'll leave the debate regarding their RW merit to others... ;-)
Specific to SL, those of us that operate SL Stock Exchanges, regardless of whether we believe they are primarily for Educational or Entertainment Purposes, or not, battle a far different beast when it comes to supporting these online virtual markets. Fundamantally, our SL markets are inherently extremely volatile - the stocks are generally thinly traded (a few thousand shares traded per day for most listings), each security is generally controlled by a very small minority (typically insiders such as myself), and our markets typically operate on a 7/24/365 basis, versus the real-world where accounts can be settled, reconciled and balanced at the end of each days trading session.
This volatility is further compounded by frequent attempts by nefarious characters to commit outright fraud - sometimes via Credit Card phishing and subsequent money-laundering attempts (ie; using the SL Banks and Stock Marlets as their washing machine in an attempt to obscure the source of the funds), and, on far too often an occassion, by persons IPO'ing a security on a Stock Market with no intent to perform the duties obligated them by their shareholders, and in some instances no attempt to even remotely execute the Business Plan put forward in the SL Prospectus that was circulated to raise capital. Yes folks, it's a sad fact, but we all know of at least one story (if not several) where that was the clear intent from the outset.
We have come a long way over the last few months; several Exchanges including our own now require Real World Identification Verification before we will list a new IPO, many of the early "fraudsters" have been weeded out, although I fear we still have quite a ways to go in that regard before anyone in their right mind would concede that we've moved beyond the wild-west frontier of early 2007. To that end, the SL Capital Exchange has invested HEAVILY over the last several months in systems level upgrades and feature enhancements that are specifically designed to help instill confidence in the mindset of investors, competence on the part of listed-company Executives, and cooperation with Linden Lab and others in the community to help improve the image and ultimately the survivability of the nascent SL Financial Markets (which we believe are an exciting, educational and entertaining adjunct to the SL environment itself. Personally, *I* DO BELIEVE that the SL Financial Markets ARE an Economic Simulation - some call it a toy economy, others call it a game - WHATEVER - in the end, it is MY belief that IF you trade these securities, AND you convert them to real world legal tender currencies then YOU MAY WELL BE SUBJECT TO TAXATION AND MONETARY REPORTING REQUIREMENTS IN WHATEVER JURISDICTION YOU RESIDE. That is, however, MY OPINION ONLY - please consult your own Tax and Legal Professional for their qualified opinion in your specific instance.
OK... Editorial aside... where were we?... Oh yeah.... Circuit Breakers... BASICALLY we've implemented a relatively safe yet MANAGEABLE Circuit Breaker Mechanism; in simplest terms, we have the ability to set a breaker at ANY VOLUME MOVE PERCENTAGE (%) PLUS OR MINUS of the OPENING share price on any given day. It is fully variable on a PER COMPANY BASIS and can be set or overridden by select Exchange staff where necessary and justified. We WILL NOT divulge what percentage we have implemented on any given day or for any given stock issue as THAT would completely defeat the purpose of the traps - REMEMBER, we are TRYING to PREVENT FRAUD AND ABUSE HERE. Please TRUST (hard to do I know!) that Arb and I are vigilant and will RAISE or LOWER the Breakers responsibly. If you cannot trust that, frankly, you should not trade here as this mechanism is by far more benign than other tools we have on the exchange that are not published for the sake of security and confidentiality. C'mon folks - think about it - in MANY instances, we know your RL Identities, your Credit Card Numbers, the IP Addresses you originate from, your trading bahavior, your SL bank and trading account balances... need I say more? WE'VE INVESTED HEAVILY IN THIS MARKET SIMULATION BECAUSE WE BELIEVE SINCERELY THAT THIS ELEMENT OF SL IS A VIABLE, VIBRANT and VITAL PART OF THE SL ECONOMY - NO MORE, NO LESS.
So... what ELSE have we accomplished THIS MONTH? I am pleased to announce that we have implemented a MARKET MAKER PROGRAM for our Exchange-Traded CEO's. Effective IMMEDIATELY, listed company CEO's will earn a .1% (point 1) commission on all round trip trades in their companies Stock. This small incentive we hope, while not a whole lot of money monetarily on most days, will encourage CEO's to better Market their Company to NEW INVESTORS and should also encourage CEO's to maintain REASONABLE Bid/Ask spreads in their offerings. This diligence and vigilance on the CEO's part will help PREVENT your Stock from being temporarily Halted by the Circuit Breakers. In our experience over the last few months, we've learned that MOST fraudsters generally seek to exploit stocks that have WIDE Bid/Ask Gaps... in one recent instance a coordinated attack by several fraudsters acting together were able to drive the shareprice of one listed company down to a Penny and back up to a buck in LESS THAN TWENTY MINUTES... this was IN THE MIDDLE OF THE NIGHT U.S. Time. Had it not been a fluke that myself and a vigilent Exchange CEO were both online trading (thank you Mael) during that very brief window, over L$600K Lindens could have been fraudulently moved through the Exchange (at the expense of shareholders!). Please think about that next time your favorite Stock is temporarily Halted... you may just be helping to catch a thief!
That's all for this month - Blessings!
Bogart Beck
CEO, SLCX
PS... For you Americano's... HAPPY THANKSGIVING
If you are travelling, please drive safely, if you are drinking... please DON'T drive!
