Benevolent dictatorship

Noun: A dictatorship in which the leader has power only because the people choose to allow them to remain. This necessitates a wise use of power and generally prevents abuses since the benevolent dictator loses power if they are unsuitable. (From the Wiktionary)

Why this post? There is currently some debate going on here at Your2ndPlace and at the International Stock Exchange.

The debate seems to be "Bottom-Top Vs. Top-Bottom" management/regulation and according to someone the VSTEX has moved from the first to the second stance, effectively aligning with the WSE.

This post will be probably disappoint someone. It won't be a deep analysis of the pros and cons of both stances. Here I won't be trying to change anyone's mind. People have been arguing on issues since the human race was born. They'll still do after this post of mine.

First off, to me financial markets on Second Life could be related to the situation in the US before the Securities Act of 1933. You can translate that into "an unregulated situation" if you like. Since that Act, more steps were taken but we won't go over the whole process now.

Let's just say that in SL we lack a lot of things (when it comes to policies, regulations, governing bodies and applicable laws) that we can have in "real life".

When the VSTEX was started there was an optimistic view of a community wanting and willing to work together, in order to build a lively virtual stock exchange. That was the philosophy before I joined the VSTEX (which happened a few later of it going public) and I must admit I quite liked it.

It did not work that way though. Now one may say that we just changed our mind, that we woke up one day saying "To the hell with shareholders, we'll do what we want and so be it".

Over the time we found out (the hard way) that exchange users were of 2 kinds: educated and uneducated (with the latter group being apparently the majority). Educated users know what they do, they often know how to game the system, sometimes they are not so well intentioned and they may resort to practices that would be frowned upon in the real world (when those practices are not outright illegal).

Of course there is nothing wrong with educated users per se, on our exchange there is plenty of well intentioned, honest, educated users.

Maybe we failed to create the conditions to develop a thriving community capable of setting standards and rules. That's a possibility. At the beginning we were too new to have a significant amount of honest, well educated users. There were the WSE, the SLCAPEX, the ISE. Extablished, bigger markets.

It didn't take much time before we had to face the Jasper Tizzy issue. Everyone who's been following SL financial news for a while should know about it. That led us to the conclusion that extra steps had to be taken, steps that the community wasn't still asking for. Almost all the requests we got at that time were along the lines of "Where's my money, I want my money, give me back my money".

Following that, we had to take a decision (someone here may argue "You really had to?" to which I would answer "Hell, yes") because we really did not like the "The CEO has fled, there's no money left, the company is delisted. Have a nice day." attitude that was standard for other exchanges I believe, before WSE's WTF (World Traders Fund) was born.

That decision was, to look for someone willing to take over the company (actually, the name and the listing with us since no money was left behind by the old CEO), trying to revive it and turn disgruntled shareholders into happy ones. At that time we did not realize it, but it was the first step for top-bottom management and regulation. Nobody ever asked for that (maybe because it was so unusual?), yet we did it. In the aftermath of the AVC history, I can tell we opened a canning of worms. However, I don't regret that decision. None of us VSTEX managers does.

Since then there have been issues with other companies and while the rules we've been adding have been implemented without directly asking the investors or running polls, the investors (of course, some of them) themselves have been asking us via emails and support tickets to build up our rules and make our control on listed companies more tight.

I'll quote Konner McDonnell:

"Evolving. Changing. Remembering. Like I expect all virtual exchanges SHOULD."

And Cocky Dagger:

"Sometimes issues can be more complicated than they appear and I would say the obvious choice is not always the best choice. I actually started out early on with one belief and time and experience has caused me to do a 180 from where I was at."

We reckon that some sections of our website should be updated and that we may want to rethink our strategies and goals. I could go on for miles here, however I'll cut it short here. I'll just invite everyone to our General Discussion forum (a VSTEX account is needed to login update: now everyone can browse our forums). We're always open to discussion.

So, you're in the trading room...

Let's say you're the "Oompa Loompa Duffo Inc. SL" CEO. Your virtual company has recently gone public and you had your IPO on a Second Life stock exchange.

You did your homework and you followed the guidelines to the point; your IPO has been an outstanding success or, even if you failed to achieve that, you raised a nice amount of money and now your company has a solid foundation to build up from.

This blog post isn't about what you're gonna do with your money, anyway. This post is about you should deal with investors, present and future.

Working for a virtual stock exchange as I do can be pretty interesting. I see everything the general public can see and a lot of the things "behind the curtains" and in my 4 months (more or less) service for the VSTEX I observed some common trends.

Most CEOs will be very proactive about their IPO, but usually their excitement will tone down once they are in the trading room. It's been a month or more (in the worst cases several months) since the IPO and the company prospectus hasn't changed a word, except for the financial data (eventually). The business plan is still a few lines long and there isn't an in depth risk analysis.

Your last news item on the stock exchange website dates to a month ago, or to several months ago; and let's be honest: your last news weren't that great, short and with abundant exclamation marks.

I believe that one of the issues behind stock prices dropping to ridiculous levels (0.1x L$ per share) is lack of proper and regular communication with the investors and the traders.

You may argue that nor you as a CEO, nor your company, earns anything from people buying and selling your company shares. While that's quite true, that's only the minor part of the picture.

First, would you like the CEO of a "0.1x company?". I certainly would not, as I wouldn't be happy to be the CEO of a company who had a successful IPO and in just a month is trading at values 5, 6 times lower than the original IPO price (can you say "unhappy investors"?).

Second, your share value is part of your company (and sometimes personal) reputation. An healthy share price is perceived as the result of an healthy, well run company. It makes people want to buy your shares and your investors are maybe the first in line to buy your products or services.

Third, being perceived as a "valued company" helps you stand out from the crowd. Gets your name in the news, people look at you. And it's free advertising.

I could go on for miles on this subject, but I think I told you the most important things. When writing, you don't have to be telegraphic (unless you're writing a newsflash or a telegram), but you don't have to flood your readers with words too (unless you're writing a novel or a poem).

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How to Make a Stock Index

There are, as I now count, six capital exchanges in Second Life. Yet only two of them (the ISE and VSTEX) have indices to measure that exchanges performance. There is also a service which provides indices and stock graphs, SL Quotes, available for public viewing. However, none of these aforementioned indices detail their methodology for how they produce this index (nor have I tried to replicate it). I thought, therefore, that it might be illustrative for readers to think about how a stock index is constructed and administered.

First, let's think about what a stock index should and should not do. We DO want it to

• Incorporate many securities (conceivably all of them from a given exchange)
  
• Adjust for new entrants and exits from the market, splits, and (probably) dividends
  
• Reflect market performance

I think it would be safe to say that we DO NOT want it to

• Be less volatile the least volatile stock, or more than the most volatile
  
• Spike or decline sharply just because of an entrance or exit by a security, split or dividend

With those constraints in mind, I'd like to introduce the concept of market capitalization (MCAP).

Definition: MCAP = (Total outstanding shares) * (Price per share)

For Second Life, I'm going to alter that definition slightly because of some companies who have a LARGE volume of outstanding shares, but only a small portion of which is actually being traded, or in float:

Definition: SLMCAP = (Total shares in float) * (Price per share)

A market capitalization gives you an idea of how large a company is on the stock market. A company with 1,000 shares trading at L$100 is smaller than a company with 1,000,000 shares trading at L$0.50, even though the L$100 stock price is higher. This is a very important concept when constructing an index, because it demonstrates that you should not form an index by simply constructing a portfolio of one share of each stock, because larger prices can give disproportionately higher representation to smaller companies. (Such an index, by the way, is called a price-weighted index.)

You can make price-weighted indices that function well (the link I used cites the Dow Jones Industrial Average as one), but I think it gives, or could give, disproportionate weight to companies that aren't actually affecting the market that much.

In contrast to this, a market-weighted index will weight each company by its market capitalization, thus giving the larger companies more say in how much the index swings.

So how does one actually construct such an index? Well, one way to do it would simply be to add up all the SLMCAPs and leave it at that. Mathematically:

Index = SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n

However, this number is likely to be quite large and cumbersome, so instead, you need to divide it by some divisor D.

Index = (SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n)/D

This divisor is very important, because it also allows the flexibility to adjust for buybacks, new entrants, secondary offers, dividends, and removals. You'll notice that I did not mention stock splits in the above. This is because (theoretically) a stock split does not affect market capitalization (ex: 2:1 stock split. Shares double, price halves, market cap stays the same). However, any of those other events would require a change in the divisor. To do this, you simply look at all values at time t, and solve:

Index_t = (SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n)/D_new

For D_new, using all the new SLMCAPs with the change incorporated into them.

How about an example? Assume you had a new entrant into the market (a new IPO). First, you find the current index value the normal way:

Index = (SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n)/D

Then, you take that index value, and include the new company in the calculation, and solve for D_new (I've bolded the new company for emphasis):

Index_t = (SLMCAP₁ + SLMCAP₂ + ... + SLMCAP_n + SLMCAP_n+1)/D_new

You can disregard the previous D at after you calculate the new value, and go forward using the new value of D until another event occurs such that you need to change it again.

Any questions? I don't know how difficult it would be for exchange programmers to incorporate such a system into their operations. And, as mentioned above, I have no idea how SLQuotes or VSTEX or the ISE calculate their indices. However, I think that each exchange should have some sort of index following it so that investors can more easily get an understanding of how the market has changed.

Ethics (or lack of)

For those of you thinking SL is a game, or a "3D chat", a post about ethics may seem totally unrelated, or misplaced.

Well, I believe that no matter your opinion of SL and how you "live" it, ethics (or talking of) definitely have a place, here or anywhere else.

Ethics (and lack of) are strictly inherent to us humans. Every day we act, talk, write; there are many instances where ethics are (or should be) involved.

Before I get carried away, I'll get to the point and I'll specify that I'll be dealing with business ethics in this post. As I wrote in my first post here, I am the Director of Communication and Public Relations for the VSTEX, a "community based virtual stock exchange".

I won't go over all the issues most of us have seen, either directly or not. Most of us know that the range of "bad things" goes from CEOs running away with the company treasury to all sorts of blackmail attempts.

Those are the things getting the attention of the press and the general public. Of course on the other side there are a lot of good businesses, but as it happens in real life, most of the times who just does his business the right way, doesn't get much press. You may or may not agree with me here, but that's how I feel.

Before joining the VSTEX team I have been a "virtual trader/investor" and a few times I have stumbled on unethical people. Being in my new office I said to myself "What should I focus on, now?".

First thing was to improve the exchange rules which they are far away from being perfect now, but any improvement is a good improvement if you ask me.

Then I started digging into business ethics and that led to the VSTEX Code of Ethics and the VSTEX Public Disclosure Policy .

Of course even the best codes and policies won't mean much if you don't live by them. A Code of Ethics should not be a collection of phylosophical mumbo-jumbo or marketing jargon and at all costs shouldn't be a trap to lure people into thinking you're all good and white.

I believe ethics to be a major factor in the competition equation. SL is a social environment, a good reputation will take you up to the stars, a bad or tarnished reputation may hinder you seriously. Who will prove to be an ethical business will have a definite advantage in the race for success.

You may be thinking "So let's get ethical now", but please stop a little before you run for your desk, to write the "Ultimate Code of Ethics".

You don't learn ethics, though by reading some good documents you may improve your ethical inclination/awareness. You must have an ethical DNA. If it isn't in you veins, in your heart, you may get close, but in the long run you may give up or fail to live by your own code.

I would encourage you to discuss ethics with your team, or fellow businesses, whomever. Look around you and ask yourself "How could I do it, in an ethical way?" or "Could I be more ethical?". Asking questions, even to yourself, is a great way to learn. Great human discoveries and inventions came out of more or less simple curiosity.

As for myself, I'll see what I can do over at the VSTEX where I found a management very incline to follow my calls and ideas. Future will tell and I'm looking forward to a bright one.

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Well, the secret's out and nobody cares...

So, I must first apologize for my extended absence. The fact of the matter is that my partner of almost 6 years was hospitalized with a drug allergy and staph infection this last week and, as Guardian Market likes to say... "RL > SL."

Last night I got an interesting call on my RL cell phone. I was in front of the television watching "Tin Man" on the Sci-Fi Channel.

I did not pick up (I screen my calls), but I found it interesting that it was a Dallas, Texas telephone number. I only know one person in Dallas.......



I knew it had to be serious if it really was him... considering he could not wait for me to come online. I immediately rushed to my office and logged in to Gmail. BOOM! Gtalk message from Arbitrage Wise... "Xavier!"

It was him that called... we had a situation. Well, he thought so anyways.

For the record, I have known about JuiceTrading.com for a while. It was a secret shared to me in confidence. I really saw no problem with it, and was happy to know there was in fact a real-world outlet for JT Financial, and that the interest our depositors were earning was actually backed by profit... it wasn't just unreasonable numbers in a MySQL database as I suspect is the case with a few banks.

I was not the only person that knew... by any means. I had talked privately with others that mentioned JT to me first. Some had a problem with it, most didn't. I was never a fan of this being a "secret," but as we now see there was no real reason for anyone to be concerned.

In any event, as Arb and I continued talking in Gmail he forwarded a release to me... it was a disclosure about Juice Trading and Sports Arbitrage. I formatted it, added a rough title, and put it up on SLR. We sent out group notices and proceeded to "spill the beans."

I still hadn't really read it... I had totally skipped over the failed blackmail attempt. I have a few problems with that - to say the least.

But the bottom line is that the first 24 hours in any crisis are really the most critical. JT Financial has not had a bank run, has not received any negative comments that I know of, and the CapEx forums don't seem to be buzzing about Juice Trading as I thought they would be.

Isegrim Nikolaidis is the only person to start a thread so far about Juice Trading, and it is more of a parody about the failed blackmail than anything else.

It's nice to see that nobody really cares. If nothing else, I see where Arbitrage Associates, LLC has garnered a ton of exposure with this forced disclosure, and JT depositors now know that there is at least some real-world credibility to the interest that they are being paid.

My prediction is that in a week this entire situation is forgotten and newbies continue to ask JTF staff, "How do you pay interest?" Only difference is that now they can provide an accurate answer without the fear of disclosing a company secret. :)

We'll see.

Xavier Mohr

Let me introduce myself

This night I happened to meet Guardian Market over at the AVC Finance Center, where I do have an office.

We chatted a bit and he asked me if I would have liked to write here. After some thinking, I said yes.

You may not know me (most likely); I am the Communication and Public Relations Director for the VSTEX, a community based virtual stock exchange in Second Life.

I do have a blog of mine but it's more a personal diary (sort of) and it's hardly updated (spare time is such a rare commodity!).

Here I'll talk about the SL financial world and maybe something else related to the metaverse we love so much.

I won't use this blog as free advertising for the VSTEX and I'll try to be neutral, anyway remember who I am when you'll read my posts.

Hope the relationship between me as a writer and you as a reader will work.

Happy trading!

Samantha Goldflake

Design Tweaks

As you may have noticed, the design of Second Chaos is still being tweaked. I'm not the best at web design, especially with regard to browser compatibility, so if any of you open up this page to find it looking like a kindergartener's homework project or vomiting up random HTML, please let me know (particularly if you use something other than Firefox or IE).

I'm also still looking for writers, so if you know of anyone (or would like to jump on board yourself!) send me an IM/notecard/email/smoke signal (bonus points if you get that last one), and I'll get you set up.

For today's humor, please check out the argument between LNL's CEO Lindsay Druart and DGD's CEO Maelstrom Baphomet in the SLCapEx Forums.

Holy Crap, Guardian

Hello World,

My good friend Guardian Market talked me into posting on his blog. Not quite sure what I am going to post about, but I look forward to it! :-P

I'm sure I will be bitching about something, as usual... definitely about Second Life, probably about finance. We'll see.

And if you haven't already done so, please be sure to check out SL Reports, where I have just inverviewed IntLibber Brautigan about the ACE stock exchange. I also have interviews with the other exchange heads coming soon, so stay tuned!

Sincerely,

Xavier Mohr
SLReports.net